Democrats and The Bush Tax Cut

By Gene Sperling

Sunday, December 1, 2002; Page B07

The midterm elections have Democrats asking a fundamental question: Are the negative results at the polls evidence that they must take on the Bush tax cut or are they a clear warning: Don't mess with taxes when it comes to the popular president from Texas?

Before any Democrat -- or moderate Republican -- makes the political calculation to just go along with making every element of the Bush tax cut permanent, he or she should understand how even the most modest tweaking of the tax cut for high earners could make a crucial difference for national savings, homeland security, Social Security and our ability to address the country's most compelling challenges in education, health and poverty.

Consider the following modest measures: A simple freeze of the tax cuts for the very top tax rate -- affecting only those families making more than $400,000, or one-half of 1 percent of the population -- would save more than $600 billion over the next 20 years. Add a provision to raise the estate tax exemption to $5 million per couple -- but avoid outright repeal -- and the combined savings rise to more than $1.4 trillion including interest savings. Go just a bit further by freezing the second rate -- affecting mostly couples making more than $200,000 -- and denying new upper-income deductions and these minor changes would bring in close to $2 trillion. Over time, such savings would close 56 percent of our current 75-year Social Security shortfall.

For most Democrats, the obstacle to calling for such modest tax freezes is political. Many fear that by advocating even a freeze, not a raising, of upper-income tax rates -- and not even this until 2004 -- they would be accused of raising taxes in a recession. Many ask: Why take the political risk when the president has vowed to let such changes happen only over his dead body? Mostly, Democrats fear the disciplined Republican chant of "tax and spend, tax and spend."

Yet the fear that tough fiscal choices will lose out to demagoguery every time is simply not warranted. Candidate Bill Clinton explicitly called for raising -- not just freezing -- taxes for the top 2 percent, and won handily in 1992, because the public believed he had an economic growth plan for the future.

How could Democrats effectively defend a decision to freeze upper-income tax cuts?

First, they need to make clear that they support extending tax cuts for more than 95 percent of Americans. With a proposal freezing only the top two rates, Democrats could hammer home a message of renewed fiscal discipline while still ensuring that families making $15,000, $50,000 or $150,000 would get the same tax cut as under the Bush proposal.

If Democrats had a bright-line message that no small business or family farm under, say, $5 million or $7 million would be taxed even a penny, would the death tax demagoguery stick enough to compel complete repeal?

Second, Democrats should make clear that a proposal to freeze future cuts would only limit -- not deny -- the tax cut to even the most well-off. With the first round of upper-income tax cuts implemented, and with the tax benefits they also receive from the reductions in lower rates, wealthy taxpayers would still do quite well. Indeed, a couple making $1 million would still receive a $10,000 annual tax cut under a Democratic rate-freeze proposal. Would the average middle-class American really believe that limiting a millionaire tax cut to only 10 times the amount given to a typical working family constitutes a tax increase?

Finally, Democrats must make clear that freezing tax cuts is not class warfare but part of an economic growth plan to promote savings, economic confidence and shared prosperity. Democrats should affirmatively call for temporary, high-bang-for-the-buck tax cuts in the form of investment incentives and a new round of progressive rebates, both because the economy needs it now and because it would debunk the false charges about Democrats trying to raise taxes during recessions.

Democrats must emphasize that most of the revenue from freezing the tax cuts would go to increasing capital for growth by increasing public savings through debt reduction and private savings through new progressive savings accounts for the millions of Americans without solid 401(k) opportunities. Democrats cannot and should not shy away from critical investments in our future, but we must choose carefully within an overall framework of fiscal discipline. We just can't afford near $1 trillion price tags on prescription drugs when we still face a long-term Medicare deficit and still have so far to go to fight child poverty, achieve universal preschool and after-school programs, and address the rising numbers of uninsured.

Or, of course, we could make the calculation that it's easier just to sit by and let the last and most expensive elements of an ideological supply-side tax for the most well-off get implemented. But then, if you are a Democrat, you have to ask yourself, what's the point?

The writer was President Clinton's chief economic adviser. He is now a senior fellow at the Council on Foreign Relations and director of its Center for Universal Education.