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January 26, 2004Some Bigger Ideas for the Presidential RaceThink about the main themes projected by our Congressional leaders on domestic policy: Republicans say: Democrats say: Are we headed for an election where domestic policy boils down to: "Bush is for tax cuts and against health coverage" and "Democrats are against tax cuts and for health coverage?" That's an OK debate, but it seems a little thin, given the additional large problems the nation should address. President Bush made a campaign speech in his State of the Union Address last week. It didn't contain many visionary new ideas. Make the tax cuts permanent. Get steroids out of baseball. Go to Mars, maybe. The Democratic candidates are talking about rescinding some of Bush's tax cuts to pay for universal health coverage. (The fact that they are talking about getting rid of tax cuts means they're serious about health coverage -- policy ideas only become "real" when candidates talk about how to budget for them.) The Democratic candidates also have lots of smaller ideas about other aspects of domestic policy. But other than health coverage, they can't really point to any true blockbuster ideas to challenge and engage the public. There are some reform plans, but nothing that would really move the country in a bold new direction. It's pretty humdrum stuff, mostly. Here are five larger, not-so-boring ideas President Bush and the Democratic candidates might consider. None of them is ready for immediate legislative action -- many of the exact policy details would take a while to develop. (Some might not work out in the final analysis.) But they would be a little more interesting than "I'm for tax cuts and he's not." Or "I'm for health coverage and he's not." Cut Taxes on New Savings, Not "Old Money" -- A Progressive Consumption Tax. Republicans want to shift taxation away from savings and investment; Democrats want to keep the tax code progressive. There might be a way to do both things at once. Unlike sales or value-added taxes, which generally have one flat rate and are collected at the point of purchase, a progressive consumption tax would have a progressive rate structure. It would be collected like an income tax. However, all new savings would be deductible. But don't Democrat's complain that President Bush is already moving taxation away from investments and savings and toward work? There is a key difference. President Bush and Congress have reduced taxes on capital gains, dividends and inheritances. The biggest tax breaks go to people who saved and invested years ago. A progressive consumption tax would be prospective, not retrospective. It wouldn't help "old money" -- it would help people who save right now, and in the future. A progressive consumption tax is not a flat tax. We would still be taxing income, or more specifically "unsaved" income. Consumption equals income less savings. Taxing unsaved income, therefore, equals taxing consumption. We could still have progressive rates. It wouldn't be easy to figure out which types of savings to exempt from tax. But we have precedents to follow, with 401k and other savings vehicles exempt from income taxes. Stakeholder Accounts -- Savings Incentives for the People Who Really Need Them. Representative Harold Ford is trying to resurrect an old think tank idea: Stakeholder Accounts. In Great Britain, these accounts are known as "baby bonds." The idea is to give each newborn a financial stake, a savings account that would compound over time, and could be used later in life. There are about 4 million children born in the U.S. each year. A $1,000 stake for each newborn would only cost $4 billion a year, or roughly $40 billion over the first 10 years. By comparison, President Bush's first tax cut was about $1.35 trillion -- 33 times more expensive. (And the Bush tax cut included some dubious "sunset" provisions and applications of the Alternative Minimum Tax or AMT, which reduced the apparent cost). All told, a proper accounting of all of Bush's tax cuts amounts to roughly $3 trillion over ten years, 75 times more than the cost of a stakeholder account plan. Which is better, cutting taxes by enormous amounts for people with high incomes and lots of investments already in place, or gradually creating a financial stake for all citizens, so they can raise their own incomes in the future? Taxing Corporate Cash Flow Instead of Accounting Income. The corporate tax system is sufficiently complex that many companies effectively have two sets of books: one for tax purposes, and one for financial purposes. Businesses routinely engage in tax avoidance activities that would otherwise be inefficient. Perhaps it would be better to tax corporations on their cash flow, which is observable, not their profits, which can be massaged and "managed." Firms spending heavily to make investments might avoid taxation, because their net cash flow from operations and investing would be negative. There's nothing necessarily wrong with that. Of course, economists and accountants would have to design such a system carefully, to prevent new problems and distortions from replacing the old. But it's hard to believe the system could get much worse than what we have now. Why aren't we having this sort of discussion? Oil Taxes Instead of Payroll Taxes. For years, environmentalists have complained that U.S. gasoline and energy prices were too low to spur conservation and reduce pollution. Americans have heard these arguments, and have largely rejected them. We just don't seem to think that pollution is bad enough or conservation important enough to embrace higher energy taxes. We want our McMansions and our McHummers and all that, as Gov. Schwarzenegger would say. But we should reconsider "green" taxes in light of September 11. There's no point beating around the bush: Our extravagant oil consumption indirectly funds terrorists who want to kill us and destroy our democratic, tolerant way of life. One idea: substituting higher oil taxes for lower payroll taxes. Payroll taxes -- taxes on the work of working people -- are regressive. Oil taxes would also be regressive. But oil taxes could help de-fund our enemies. New oil taxes wouldn't be a net tax increase if payroll taxes were cut in an equal amount. And the new oil tax revenues could be added to the Social Security and Medicare "trust funds" just like the payroll taxes they replaced. Finally, new hybrid trucks and SUVs will make higher gasoline prices bearable in farm and ranch country. Western states, where people have to drive long distances, would no longer be disfavored by higher fuel prices. Putting the "Insurance" back in Social Insurance Programs. Republicans believe that by enacting a prescription drug benefit last year, they can be sure that senior citizens will vote for them this fall. Democrats believe if they complain enough about the drug benefit not being very generous, seniors will vote for them instead. Both of those beliefs are debatable, but the political wizards in both parties take it as Holy Writ. However, neither party is really interested in insurance -- protecting people from devastating misfortune or financial loss. Instead, they are trying to tailor the drug benefit so that most seniors -- healthy or sick -- will get tangible pocketbook relief. The Medicare debate is about social benefits, really, not social insurance. Politicians may be right when they assume that seniors don't want mere insurance -- they want financial relief they can spend. Cash in hand, so to speak. But are voters really comfortable re-designating our social insurance programs -- Medicare and Social Security -- as social benefit programs, with policymakers falling all over each other to promise cash benefits to all seniors, regardless of need? These programs aren't free. In fact, the cost of the social insurance programs will severely strain the federal budget when the huge baby boom generation retires and joins the entitlement rolls in large numbers, after about 2010. Our candidates should ask: Why are we falling all over ourselves to provide "benefits" to all seniors, when basic "insurance" would suffice for many of them? Do we really need to bribe seniors with cash benefits to ensure the political future of these programs? Wouldn't Medicare and Social Security be even more popular with the next generations of taxpayers if their costs weren't so high? A First Step -- Bipartisan Budget and Tax Reform Commission. President Bush desperately needs a Budget and Tax Reform Commission to provide political cover for the almost inevitable (and painful) tax increases and budget cuts that we will be forced to make after the 2004 elections. A Democratic winner in 2004 would face the same budgetary pressures. The federal deficits aren't likely to go away on their own. We need to get started on budget and tax reform for a simple reason -- it could be a socially acceptable smokescreen for at least some modest revenue increases and spending cuts. The Congressional Budget Office projects that federal revenues will be only 15.8 percent of GDP in 2004, about 2.5 percentage points below their long-run average of 18.2 percent. Meanwhile, President Bush and Congressional leaders are spending money hand over fist. Assuming a continuation of large military expenditures overseas, federal spending will remain at or above 20 percent of GDP for years. In the absence of large-scale entitlement reforms or dramatic spending cuts, the federal government will not be able to pay its bills without tax increases in coming decades. If we continue to run huge deficits, the interest costs of our debt -- whether it's held by U.S. or foreign investors -- would grow to gigantic proportions. Links: |
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Centrist Policy Network, Inc. |
