The Magazine

Watch Your Wallet

Jan 19, 2004, Vol. 9, No. 18 • By FRED BARNES, FOR THE EDITORS
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THE DEMOCRATIC REVERSAL on taxes has come full circle. Forty years ago, Democratic president John F. Kennedy believed tax increases would neither balance the budget nor create jobs. Kennedy proposed deep cuts in income taxes that were enacted by an overwhelmingly Democratic Congress after his death. In the 1980s, Democratic presidential nominees Walter Mondale and Michael Dukakis had a different tack. Mondale said it was sad but true that federal taxes had to be raised. Dukakis said he might boost taxes, but only as a last resort.

Now all nine Democratic presidential candidates agree that increasing taxes must be a first resort. This is an amazing turn of events. Sure, some would sweep away President Bush's tax cuts in their entirety, and others would preserve the cuts for lower income brackets. But this striking fact remains: While serious candidates like Richard Gephardt and Joe Lieberman don't agree with wacko candidate Dennis Kucinich and demagogue Al Sharpton about much, they're on board with them on taxes. And by the way, so are Democratic congressional leaders.

It's as if Democrats live in a parallel universe where ordinary economic rules don't apply. Although the Bush cuts have helped trigger a roaring economic recovery, Democrats would repeal most or all of them. Howard Dean, the frontrunner for the nomination, would go even further. He would also lift the cap on the Social Security and Medicare payroll taxes, now set at $87,000 of income. The result would be still another tax increase, for employees and employers alike. This would particularly damage small businesses, the source of most of the new jobs in America. The tax hike mania has seized even Lieberman, the most sensible of the Democrats. He is not content to restore the top rate for individual income, now 35 percent, to its Clinton-era level of 39.6 percent. He would raise it to 44.6 percent. So would General Wesley Clark. This would be nearly as economically counterproductive as Dean's payroll tax increase.

There's a devious aspect to the Democratic tax message. Lieberman, Clark, and the rest have touted their plans as tax reform. Other Democrats, notably Governor Mark Warner of Virginia, have done the same. Their aim is to disguise a huge increase--Virginia's largest ever in Warner's case--as merely a fair-minded restructuring of the tax code. And the press has mostly played along. Warner would raise the sales tax from 4.5 percent to 5.5 percent (while reducing it to 2.5 percent on groceries), boost the top rate from 5.75 percent to 6.25 percent, and increase business taxes. But the Washington Post continues to echo Warner's spin that this is tax reform (see picture).

Sorry, but real tax reform is something different. It has a neutral effect on revenue. It aims to broaden the tax base by reducing rates and eliminating special tax credits, exemptions, and loopholes. And this makes for a simpler, fairer system, leading to a more productive economy. With high rates like the ones Democrats are advocating, the pressure to carve out new loopholes becomes irresistible. Clark's plan, as the Wall Street Journal points out, is actually "reverse tax reform." He would increase taxes on a smaller base.

A falsehood is at the root of Democratic tax plans: that the wealthy bear less of the tax burden. In truth, the top 1percent of earners paid 36.3 percent of income taxes in 2000, up from 19.75 percent in 1979. Call it trickle-down economics if you wish, but it's this 1percent of Americans who are counted on to save, invest, stir economic growth, and create jobs.

As the presidential caucuses and primaries begin, some Democrats are beginning to fear that advocating tax hikes is political suicide. Even Dean, having been pounded by rivals over his desire to increase taxes on middle and lower income workers, wants to take the edge off his proposed hikes. Of course, he and other candidates who talk up middle-class tax relief don't favor a net reduction in taxes, only a few "targeted" cuts. And that touches on another problem: the near absence of prominent Democratic tax-cutters. At the moment, there are only two, Governor Bill Richardson of New Mexico and Senator Zell Miller of Georgia, who is retiring at the end of this year. These two worry that the reputation of Democrats as tax-raisers is hardening. They have reason to worry.

--Fred Barnes, for the Editors