May 28, 2007

Presidential Candidates: Let’s Talk Taxes

The biggest economic issue of the young century is coming to a head in just a few short years. How the next president and Congress handle it may well determine the nation’s economic well-being for decades to come.

So when is someone going to talk about it?

The crowning achievement of the Bush presidency is arguably the tax rate cuts implemented on income, capital gains and estates. All three tax rates were bloated in the aftermath of the Clinton years. All three rate reductions have contributed to the robust economy and low unemployment rates America has enjoyed since 2004.

And all three are in danger.

From the cowardly Republicans who ran Congress during the first six years of the Bush Administration, the best that could be extracted was a collection of temporary rate reductions. The capital gains rate is set to go back up in 2008. The income tax rates revert to their old, higher selves in 2010. And the estate tax, which is on a course toward gradual elimination by 2010, is set to return to its astoundingly high level of 55 percent in 2011.

It will require action by Congress and the signature of the president to prevent all this from happening. If they do nothing, the rates revert to the pre-cut levels automatically.

The fact that these rate cuts were not made permanent in the first place is one of the primary reasons the Republicans who were leading Congress deserved to lose their majority. Unfortunately, that means they got replaced by the Democrats, who never saw a tax cut they liked, and will certainly not take action to make a tax cut permanent when they can cause taxes to rise by simply doing nothing.

The fate of these tax cuts, and the priority to make them permanent, should be the top domestic issue of any serious Republican candidate for president. So far, it is not.

We know who thinks what on abortion, gun control, immigration and a whole host of other domestic issues that the president may or may not impact between 2009 and 2013. There is some general talk about who is for more or less spending, and who has a record of favoring or opposing tax cuts.

What we do not hear is a sense of urgency about making sure that these three tax rates are not permitted to automatically rise. At this moment, there is little reason for optimism that they will survive. The capital gains cut is as good as dead, since there is no chance to put a tax-cutting Congress in place before it sunsets in 2008.

Saving the income tax cut and the estate tax elimination will require not only a Republican president but also a Republican Congress to be elected in 2008 – unless, of course, we get a president with Reagan-type abilities to win relatively moderate Democrats over to the tax-cutting camp.

But that won’t happen if the public isn’t clamoring for it, and right now, the issue isn’t even on the public’s radar screen. Indeed, much of the public thinks the deficit is rising (it is falling), and that tax rate cuts cause higher deficits (they do not). Few understand the relationship between lower marginal tax rates and economic growth, so few have reason to expect economic peril by the end of the next president’s term unless the capital gains, income and estate tax cuts are made permanent.

Most of today’s Republican candidates are trying to associate themselves with Ronald Reagan. All right then. Reagan considered it his job to make Americans understand that high tax rates were causing the economic malaise that gripped the country in the late 1970s. He was so effective at doing so that he was able to get a huge tax cut package through a Democratic-controlled Congress in 1981. When the voters chose Reagan in 1980, they were choosing tax cuts, and everyone knew it. It was one of the major issues of the campaign.

The Republican candidate who runs and wins on this issue in 2008 will be passing the first test of presidential leadership – leading on an issue that really matters, not just one that polls well or “resonates.” Then such a winning candidate might start to become worthy of the Reagan comparisons.

But first, someone will need to start talking about this looming tax disaster, and the imperative of stopping it.