Democrat Tax Alternatives Could Distance Them from Blue State Voters

Michael Franc

11/30/2007 11:08:27 AM - Michael Franc

The next president will be judged by the adequacy of his (or her) response to the two overriding challenges facing America today -- winning the war on terrorism and surmounting the fiscal consequences of the baby boomer retirements without suffocating tax increases.

The two fields of candidates couldn’t be further apart in how they would address them. This week, let’s examine the boomer’s imminent retirements; next week we’ll consider how they propose to win the war against terrorism.

The Democratic field follows its party’s penchant for class warfare. The formula is straightforward enough: Offer a majority of voters real or imaginary tax relief (imaginary is when you relieve taxpayers of a future increase in their tax burden that they’ve never actually had to face, such as the Alternative Minimum Tax) or new government benefits. Then pay for it by shifting more of the tax burden to the “rich.”

Virtually all of the new policy initiatives the Democratic candidates espouse are directed at middle- and lower middle-class voters. Rather than talk about the need to restrain entitlement growth, the Democratic field focuses instead on ways to broaden the government’s role in our daily lives -- increased access to government-designed health coverage (opening Medicare to displaced workers between the ages of 55 and 64, for example), and more government child care, student loans and mortgage insurance.

Republicans, in contrast, look first to the tax side. They would make the Bush tax cuts permanent and create a new one by repealing the AMT with no offsetting tax hikes. All speak fondly of restructuring our health system around patients, our educational system around parents, and giving individuals more opportunities to save for retirement. As the debate over expanding SCHIP has shown, no Republican wants to draw the middle class into the tender mercies of government programs, subsidies or guarantees.

What does all this mean?

Apparently, the Democratic field finds it acceptable to allow the nation’s current tax burden, now around the post-World War II average of 18.5% of GDP, to rise steadily to historically unprecedented levels -- as high as 23.5% of GDP within a few decades. The goal of Republican candidates appears to be to maintain that burden at its current level or, if possible, lower it. But under no circumstances do they believe it should rise.

Sens. Clinton and Obama want to allow the Bush tax cuts to expire, but only for those earning more than $250,000; former Sen. John Edwards would subject even more taxpayers to this higher tax burden (starting at $200,000). The Democratic field would shield middle-class taxpayers from the increased tax burden they would feel if the Bush cuts lapse by continuing the $1,000 tax credit for children, marriage penalty relief, and the 10% bracket for low-wage earners. Obama proposes giving 150 million middle-income Americans up to $500 in tax credits and eliminating income taxes for seniors making below $50,000 a year. Several say they would finance their ambitious universal government health plans by increasing taxes even further on the rich.

The Democratic field applies the same logic to the looming multi-trillion dollar shortfall in Social Security.

Clinton sees no need to alter Social Security’s promised level of benefits, rejects proposals to raise the retirement age, and claims future economic growth will take care of Social Security’s projected fiscal shortfall. Obama, in contrast, has incited an internecine Democratic war over his proposal to hit workers with incomes over $200,000 with Social Security payroll taxes. “If we simply ask higher income Americans to contribute a little more,” he says, “we can shore up Social Security for generations to come.”

But hold on. The wealthiest 1% of taxpayers (about 1.3 million in all) already bears a disproportionate share of the tax burden. In 2005, the latest year for which IRS data is available, they earned 21% of all the adjusted gross income. But they paid a whopping 39.4% of all the income taxes. And the 13 million households who earned more than $104,000 (the wealthiest 10%, who would bear the brunt of higher Social Security payroll taxes) accounted for over 70% of Uncle Sam’s take.

While the policy question is how much more they can bear, the political question may surprise the class warriors. Because the majority (58%) of wealthy households (defined as individuals earning over $100,000 and couples earning over $200,000) now reside in so-called Blue States, any campaign platform predicated on class warfare risks alienating the millions of Blue State voters who would have to foot the bill.