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Digging out of Bush's Tax-cut Hole
Published on Wednesday, August 4, 2004 by the Boston Globe
Digging out of Bush's Tax-cut Hole
by Robert Kuttner

THANKS TO George W. Bush's tax cuts, the federal government faces a long-term fiscal crisis. An intended side effect is to undercut social investment of the sort that has bonded two generations of voters since Franklin Roosevelt to the Democratic Party.

The current year's deficit is projected at $440 billion. If elected, John Kerry will need to find some $300 billion a year just to get the budget into decent fiscal shape -- and then even more money if he hopes to deliver on his promises to broaden health care coverage.

Where will the money come from?

Kerry has said he will restore pre-Bush tax rates on people making more than $200,000 a year. That's a good start, but it would raise well under $100 billion a year, not enough to both balance the budget and finance the new program initiatives.

Because of the Bush tax cuts, federal revenue as a share of the total economy is now back down to the levels of the 1950s. And in the 1950s, there was no Medicare, and Social Security was a much smaller program. Leave out Social Security and Medicare and federal domestic spending is down to levels not seen since before World War II.

What to do? Here are three ideas.

First, it's not necessary to achieve absolute budget balance. During the great post-World War II boom before Reagan, federal deficits normally fluctuated between about 1 and 2 percent of gross domestic product. With a modest deficit in that range, the economy still grows faster than the national debt. The main imperative is to keep the debt manageable, not to have absolute budget balance. That sounds like an obscure technical point, but the difference between absolute balance and a deficit equal to 2 percent of the economy is more than $200 billion a year -- enough to finance universal health care.

Second, let's restore taxes on the super-rich. In California, a new ballot initiative, Proposition 63, would levy an income surtax on incomes over $1 million. The proceeds would be used to deal with mental illness and homelessness. Well under 1 percent of California's population has incomes in excess of $1 million. But guess how much money that 1 percent surtax raises? An estimated $770 million a year, according to proposition organizer Bill Zimmerman. And the initiative is currently leading by about 2 to 1 in polls.

It's somehow fitting to tax the very well housed super-rich to remedy the scandal of homelessness. The federal government could also match sources of revenue to appropriate uses. How about restoring the estate tax so children who don't have trust funds could go to college or buy their first home?

Third, let's get serious about tax enforcement. Corporations are paying less and less of the total tax bill because multinational companies are allowed to book much of their overseas income in tax havens where no taxes are owed.

In 2001, the incoming Bush administration scuttled a proposed tax agreement among the major nations that would have put most tax havens out of business. It did so as a favor to its corporate allies, even though money-laundering via tax havens has new ominous perils in an age of terrorism.

The laundering of corporate profits through tax havens costs the US Treasury at least $100 billion a year in collectable revenues, according to former IRS officials. Failure to collect this money means either that other taxpayers make up the difference, that the federal deficit swells, or that citizens are denied public services.

At least $100 billion more is uncollected thanks to domestic tax avoidance schemes, which are used mostly by very wealthy people using such devices as complex partnership gimmicks.

In the 1990s, House Speaker Newt Gingrich got Congress to limit the enforcement tools of the IRS, using scare stories based on a handful of highly exaggerated abuses. Today the IRS is spending too much of its scarce enforcement resources looking for technical violations by low-income taxpayers who take the earned income tax credit and not nearly enough on tax-avoiding millionaires.

Since a program of tax enforcement targeted at where the money is could yield well over $200 billion a year, a President Kerry could restore both fiscal responsibility and social investment without raising taxes on the middle class.

Beyond these three approaches, the next president of the United States needs to use some of the prestige of his office to restore the idea of progressive taxation to political respectability. Otherwise he will find himself without the resources to restore the idea of government to respectability.

Robert Kuttner's is co-editor of The American Prospect.

© Copyright 2004 Globe Newspaper Company.


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