Bush tiptoes on taxes

January 21, 2003|By Steve Chapman

CHICAGO - Does anyone remember the 1986 tax reform law pushed through by Ronald Reagan and applauded even by many liberals? It had something for everyone: It reduced rates, made the rules simpler and more coherent, and eliminated income taxes for millions of the poor. It was so wholesome and sensible that it couldn't last. It didn't.

Today, the tax code is once again longer than a Russian novel, but unlike a Russian novel, it can't be translated into English. Rates have risen, rules have grown ever more complex and mystifying and just about everyone who pays income taxes feels like everyone else is gaming the system.

Given the abundance of defects in the tax code, any change stands at least an even chance of being an improvement. President Bush's new economic package passes that test. But there is a distinct lack of Reaganesque boldness in this program. It moves things in the right direction, but on tiptoe.

For conservatives to be enthusiastic about what Mr. Bush offers suggests they are settling for too little.

The economy and individual taxpayers would be better off if the tax code were simpler and marginal tax rates were lower.

Low marginal rates furnish an incentive for taxpayers to work and invest more, which is good for the economy. They also lessen the inducement for taxpayers to put cash into tax advice and tax avoidance gimmicks, which are bad for the economy.

In this respect, Mr. Bush's proposals are positive. They improve incentives by cutting rates - with the top rate going from 39 percent to 33 percent and the bottom rate from 15 percent to 10 percent - and by moving the reductions up from 2006 to this year.

Even if you don't close a single loophole, lower rates will reduce the use of such gimmicks because the return from them will drop. But if you think Mr. Bush's plan is bold, remember this: The top marginal tax rate would still be higher than it was when Bill Clinton arrived in Washington.

Attacking the double taxation of dividends is also worth doing, since it promotes better corporate decisions. The main problem with the Bush plan is that it gives the tax "break" to individuals, many of whom aren't paying taxes on dividends anyway, because their investments are in tax-sheltered vehicles.

The current policy has the pernicious effect of pushing corporations to take on too much debt, since interest payments are deductible but dividends are not. But to really fix that problem, you need to let corporations deduct dividends. Mr. Bush, however, wasn't willing to do something that might look like a favor to corporate America.

He feared that Democrats would attack his plan as a windfall to the rich, but - and this will come as a shock - they've done that anyway. The criticism overlooks the obvious fact that you can't cut income taxes without helping high earners, because they're the ones who are paying the vast bulk of them these days.

The question to ask, in any case, is not who gets the tax cut but who gains from it in the long run. One way to promote capital formation is to reduce the taxes on investment income, and most investment income goes to the affluent. But more capital formation is also the surest way to raise the long-term earnings of workers.

New factories and new equipment raise the productivity of employees, which makes them more valuable to their companies, which pushes up wages, which Democrats should favor. You can punish the rich by putting a big tax burden on capital, but the laboring class will pay an even bigger price.

The chief drawback of the Bush plan, aside from its modest scope, is that it would greatly increase the deficit. One way to avoid that is to cut federal spending even as you're reducing federal revenues. But no one - not even conservatives - expects this president to do anything but enlarge the federal behemoth.

The problem is not that Mr. Bush thinks taxes are too high but that he thinks spending is too low.

Steve Chapman is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. His column appears Tuesdays in The Sun.

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