Tax Cuts: Let the Negotiations Begin

It's time for the Democrats to stand up and be counted in the great tax debate in Washington. Republicans have proudly put forth their $1.6 trillion plan to cut marginal rates on income taxes, with most of the benefits going to the well-off. This is only fair, since the upper middle class and the rich pay most income taxes. Now it's the Democrats' turn and they should focus on the working poor and middle class, who don't pay much income tax but bear a heavy burden in payroll taxes. Helping them out is only fair, too. If the Democrats would stop dithering, then negotiations with the Republicans could begin over the proper mix in tax relief. A tax bill, fair to all, could be passed by late summer.

Here's some advice to the Democrats: Don't simply try to water down President Bush's tax plan. Be true to your principles and forge your own program. That means tax cuts for people at the lower end of the income spectrum. As born-again fiscal conservatives, call for a tax cut that is modest in size. And as protectors of America's have-nots, use tax cuts to strengthen the safety net if you can.

Drawing on reports and ruminations by the Democratic Leadership Council, the Progressive Policy Institute, and the liberal caucus in Congress, there are several possible tax plans that would reflect Democratic principles. A refundable income-tax credit that offsets a percentage of the Social Security payroll tax is one option. Everyone would get some tax relief, with most of it flowing to the working poor and middle class. Lowering or eliminating the phasedown rate in the Earned Income Tax Credit (the more you make, the less you get) is an alternative. It reduces the marginal tax rates for the working poor. Just giving all taxpayers a rebate of $300 to $500 is another option. President Gerald R. Ford enacted a rebate program that amounted to 0.5% of gross domestic product at the time. Rebates have the virtue of getting cash into people's hands faster than any other tax-cut plan--a help if the downturn turns into recession. All these multiyear plans could be made contingent on the continued rise of surpluses and the steady paydown of debt--a fiscal plus.

There are a number of out-of-the-box ideas Democrats might ponder, as well. The kind of money being discussed, $1 trillion to $2 trillion, is a lot of dough--maybe even enough to start converting Social Security from a pay-as-you-go system to a fully funded pension system that would need lower payroll taxes to support it (page 30). That would help make sure the boomers' retirement doesn't crush everyone else. Other options for Democrats are tax credits for private savings accounts or private health-care insurance.

Republicans have a strong point. It is fair to cut taxes for those for whom the total marginal rate is a confiscatory 50%, as it is in many states. And cuts in marginal rates do, in fact, have powerful incentive effects. But the Democrats have a point, too. Everyone who pays taxes deserves to share in a big cut. It's time they made their side of the case.

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