Now to the president’s proposals. I’m not accusing George W. Bush of abusing amphibians. But whether by accident or design, he’s taking the frog-boiling approach to changing the tax system. He started out with eliminating the inheritance tax in his 2001 tax bill. Sure sounded reasonable. Ribbit. In December, with the economy in the tank, he proposed a “stimulus” package consisting mostly of eliminating income taxes on most corporate dividends. Who can object to paying fewer taxes and ending the supposed unfairness of “double taxation of dividends”? Ribbit, ribbit. Last week Bush proposed huge new tax-favored savings plans. They sound reasonable, too. Federal revenues would even rise in the short run because IRAs and such would no longer be tax-deductible. Investors would benefit in the long term by being able to compound their money and draw it out tax-free. Ribbit, ribbit, ribbit.
Each piece is presented as a reasonable, modest step, and is debated in isolation. But look at the president’s proposals taken together, and you see what’s going on. He’s trying to make income from investments tax-free, which would radically transform the cherished notion of a progressive system–that people who have done better, thanks to what this country has to offer, should pay taxes at a higher rate than the less fortunate. People get that nice glow contemplating how much this plan or that plan would save them, not realizing that the warmth they feel is the water temperature rising.
Had Bush run on a platform to eliminate all taxes on investment income and to make America safe for inherited wealth, we’d be discussing the budget proposals presented last week by President Gore. But by turning up the heat slowly, Bush has gotten the inheritance tax all but eliminated, and has a good chance to get Congress to enact the rest of his program. These cuts would greatly reduce federal tax revenues, but the faithful argue that the cuts will spur enough growth to offset the giveaways. There aren’t any reliable statistics on this; we’re supposed to take it on faith. Which is fine if you’re talking about religion, not so fine if you’re talking about seriously messing with an economy that has produced the most affluent society in history.
Feeling warm yet? Here’s where the water really gets hot. The president may or may not win his bet on the economy. But this much is certain: the president’s package would weaken political and financial support for Social Security. His no-tax saving and no-inheritance-tax plans would kick in fully about a decade from now. That’s around the time that the Social Security system is projected to start running cash deficits. With millions of Americans presumably enjoying the tax-free fruits of savings programs, the political support of Social Security would be undermined: I’ve got mine, Jack, too bad the government won’t give you yours. Financial support for Social Security would also be undermined, because the government just won’t have the money to bail out the beneficiaries. (President Bush proposes to “reform” Social Security by letting wage earners open private accounts with some of their Social Security tax payments. But those same payments now go to pay benefits to retirees. There’s no money in Bush’s budget to keep checks flowing to today’s beneficiaries if younger taxpayers get to put Social Security tax money into individual accounts.)
When crunch time comes–which it will, if the president’s plans are adopted in full–the only way out will be to sharply increase income taxes on salaries, or to adopt a totally new tax. The obvious one: a consumption tax, such as a national sales tax, which many other countries have. Why, a mere 1 percent tax on a $10 trillion economy would produce $100 billion a year, maybe more.
You can argue that moving from income taxes to consumption taxes is a good thing–but let’s debate it publicly. Let’s also debate how best to stimulate the economy, and whether it needs stimulus at all–or will recover on its own. Radical economic changes shouldn’t be imposed by stealth, no matter how convinced proponents are of the soundness of their thinking.
If frogs could talk, they would tell you that affable fellow putting them in that nice pot of cold water couldn’t possibly mean to cook them. Until, of course, they hear someone asking for melted butter, garlic and a fork.
