Giving the Boot to the Tax-Cut Era
Politicians say slashing taxes is no longer a vote getter
Americans like Lara Kulpa must drive the White House crazy. Kulpa runs her own search-engine-optimization business, Anubis Marketing, in upstate New York and wonders when Uncle Sam is going to give her a tax cut. "Right now I typically estimate about 25 to 30 percent of my income going for taxes," she says. "I'm single, don't own a home, or [have] any other major deductions other than those for my business, so for me, that's a little high. ... We've been hearing about tax cuts forever, and yet personally, I've not seen any."
Of course, despite Kulpa's comments, the economy has seen some $2 trillion worth of tax reductions enacted during the past six years, with investors, married couples, small-business owners, and wage slaves all getting cuts. President Bush's 2001 tax cuts lowered marginal tax rates, increased the child tax credit, and provided "marriage penalty" relief, among other provisions. The 2003 edition cut rates on capital gains and dividends while accelerating when the 2001 rates cuts would fully take effect.
But unfortunately for Kulpa and any other Americans hoping for sweeping tax cuts of the Reagan and Bush eras in the future—much less anything more radical such as totally scrapping the current tax code and instituting a flat tax or a consumption tax—they will probably be disappointed.
"Fiscal [realities] and the political climate make that model of tax reform unrealistic," says Ramesh Ponnuru, a senior editor at the conservative National Review magazine and author of a controversial article advocating that the GOP push for family-focused tax cuts instead of more broad-based reductions.
Ponnuru isn't just referring to the obvious reality that Democrats—who haven't pushed for big tax cuts since JFK was sitting in the Oval Office—now control Congress and have a pretty good shot at expanding their dominance in 2008. Congressional Democrats, in their budget proposal presented earlier last month, are apparently attempting to save only Bush's 2001 child tax credit and marriage-penalty relief provisions.
New pay-as-you-go budget rules mean advocates would need to find hundreds of billions in budget savings to keep the cuts in marginal rates, as well as the 2003 capital gains and dividends cuts past 2010, when they're due to expire. It would cost $182 billion to keep all the marginal tax cuts for 2010 and 2011, $32.5 billion to keep the investment tax cuts, and $27 billion to keep the child tax credit—and all that is on top of the $50 billion a year it will take to halt the increasing reach of the alternative minimum tax.
What's more, budget hawks may well push for higher taxes to help pay for healthcare and Social Security reform. (The baby boomers start reaching full retirement age in 2012, and Social Security costs start to exceed revenues in 2017.) At a recent Democratic presidential candidate healthcare forum organized by the Service Employees International Union, John Edwards said it would be "unrealistic" to think that health insurance coverage could be expanded without raising taxes. The common beltway wisdom: "After 2008, the default budget position is going to be higher taxes," says policy analyst Thomas Gallagher of ISI Group in Washington, D.C.
Status quo. For now, the major GOP presidential candidates are going no further than vowing to preserve the Bush tax cuts due to expire in 2010 despite the electoral success tax cutting has brought the party in the past. Rep. Paul Ryan, ranking minority member of the House Budget Committee, sees the same lack of enthusiasm on Capitol Hill and thinks he knows why it seems so widespread. "It's the political consultants in the party," he says. "They're the ones who are advising [Republicans] to run away from this issue."
If so, then those consultants may merely be relaying what the polls are saying. They're hinting that America's great fever for lower taxes—ignited in 1978 with the passage of California's Proposition 13 and a successful push by Republican Rep. William Steiger to cut capital-gains taxes—has cooled.
Recent polls of Americans' major concerns show taxes nowhere near the top. In a recent CNN/Opinion Research poll, taxes didn't rank as a pressing concern, with only 31 percent describing them as "extremely important" vs. 44 percent for healthcare policy. And a CBS poll found that Americans have a case of the blahs about the 2001 tax cuts, with 39 percent saying they should be made permanent and the same percentage in favor of allowing them to expire.
To some extent, tax cutters are victims of their own success. The top marginal income tax rate was 70 percent when Ronald Reagan took office in 1981. Today, it's half that, with the brackets indexed for inflation. Tax revenue as a percentage of gross domestic product—18.4 percent in 2006—is about at its historical average, possibly hinting that tax rates are more or less where they should be. According to the Tax Foundation, the number of taxpayers who either had no income tax liability—or had none after taking advantage of the code's many credits and deductions—has surged since 2000 from 30 million to 42 million in 2004.
Another possible reason for tax-cut apathy is that after the 2001 tax cuts were passed, there was no economic boom. Instead, what voters saw was a big tax cut signed in 2001, lousy GDP growth in 2002, and the budget surplus turn into a big deficit that is only now shrinking. "So not only did those tax cuts not seem to work," says Pat Toomey, president of the pro-tax-cut Club for Growth, "they seemed to be counterproductive." (Interestingly, an economic simulation run by Goldman Sachs predicts the economy will fall into a recession in 2011 if all the tax cuts are allowed to expire, even with massive Federal Reserve interest rate cuts.)
One escape clause from this scenario: If tax revenues keep pouring in, the budget could move back into the black in the near future, say 2009, and generate pressure to send that extra dough back home. "Congress hates surpluses," says budget expert Richard Kogan of the left-of-center Center on Budget and Policy Priorities. Longer term, there seems to be a cycle of big tax cuts every generation. There was Kennedy's tax cut passed in 1964, Reagan's in 1981, and Bush's in 2001 and 2003. So pay attention, Chelsea Clinton, George P. Bush, and other possible future politicos, tax cuts could be back on the agenda in 2032.
This story appears in the April 9, 2007 print edition of U.S. News & World Report.