Why the Democrats Can't Win On Taxes

Only hikes can fund plans for health care, education -- and yes, breaks for workers

As Democrats battle their way to the Jan. 19 Iowa caucus and the New Hampshire primary a week later, middle-class tax cuts have become a hot topic. Retired General Wesley K. Clark has proposed family tax breaks. Senators John F. Kerry of Massachusetts and Joseph I. Lieberman of Connecticut are pitching plans to trim taxes for working families. Not to be outdone, front-runner Howard Dean will soon back a cut in the payroll tax.

Popular middle-class tax breaks are always a voter favorite. But the party's would-be Presidential nominees are headed into more dangerous political territory by proposing to raise overall taxes, even though most of those hikes would be aimed at the wealthy and corporations. Such a net revenue boost would pay for tax relief for working families, fund new spending on health care and education, and help reduce the budget deficit.

The Presidential wannabes are hoping that middle-class voters will respond to calls for tax fairness. The Dems will argue that under President George W. Bush, the wealthy were the biggest beneficiaries of tax cuts, while working Americans got only crumbs. Says Democratic pollster Diane Feldman: "People are angry at what they feel are fundamental [GOP] failures to serve and protect them."

As a result, Dems will vow to shift the tax burden to the wealthy and away from the middle class. Says Clark: "Too many people are working harder and harder and earning less and less. It's high time we started valuing families. That's exactly what my tax reform plan will do."

DISTANT SECOND. But many analysts fear these Presidential hopefuls are playing right into the hands of the GOP. After all, in the game of political word association, when a Democrat says "tax," voters think "hike." And in a battle with Bush, who has made tax-cutting his signature domestic priority, Dems risk coming out a distant second. "Democrats are better off changing the subject," says William G. Gale, a tax economist at the Brookings Institution. "Trying to outdo Bush on taxes is neither good politics nor good policy."

Still, the candidates are pushing ahead. Even Dean, who has resisted a middle-class tax cut, is scrambling to come up with a distinctive proposal. BusinessWeek has learned that his plan is likely to include some form of income-tax credit to offset payroll taxes. One idea under discussion would give workers a credit for the Social Security tax they pay on their first $10,000 of wages -- roughly a $750 tax cut. But such a scheme could cost up to $70 billion a year, and Dean says he won't release details until he figures out how to pay for it.

To some degree, Dean and other Democrats can't avoid the tax issue. To fire up their base, all embrace costly new programs. For example, the cheapest health plan, offered by Senator John Edwards (D-N.C.), carries an annual price tag of more than $50 billion. But with deficits likely to exceed $400 billion a year for the foreseeable future, Democrats are in a box. They want to rip Bush for his profligacy. But they also need to pay for their ideas and make their deficit-reduction promises credible. None has proposed major spending reductions. That leaves risky tax hikes.

To soften the blow, most candidates cast their plans as a sweeping overhaul of the Tax Code. But to many economists, the blueprints are merely efforts to redistribute the tax burden away from the middle-class and to the wealthy. To reformers, tax overhaul means cutting rates for all and dropping targeted breaks. By contrast, most Democrats would raise top rates and expand deductions.

This talk has GOP strategists smiling. They note that every candidate would raise overall taxes. And that, they insist, is political death. Says Stephen Moore, president of the antitax Club for Growth: "People are not in a taxing mood." His organization has run ads in Iowa blasting Dean's "tax-hiking, government-expanding, latte-drinking" agenda.

But the Democrats may not have much choice. At the moment, Bush's deficits have created more of a problem for his opponents than for him. Until Democrats figure out a way to shove the fiscal burden back onto the President, they'll have a tough time waging an effective campaign.

By Howard Gleckman in Washington

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