Take It Back 9: Taxes

In my latest reading of Take It Back: Our Party, Our Country, Our Future (copyright 2006), James Carville and Paul Begala talk about taxes.

Carville and Begala criticize Republicans for supporting a lower tax burden on upper-income people, and a higher tax burden for those who are not upper-income.  They give examples.  First of all, there was a bill, passed in 2004 with overwhelming support by both Republicans and Democrats, that gave generous tax-breaks to corporations while reducing the per child tax credit for families making under $10,750 a year.  Second, on pages 260-261, Carville and Begala talk about aides to President George W. Bush who sought to "shield interest, dividends, and capital gains from taxation, and expand tax breaks for business investment", while possibly "eliminating the deduction of state and local taxes on federal income tax returns and scrapping the business tax deduction for employer-provided health insurance" (Carville and Begala here are quoting from a November 18, 2004 article in The Washington Post).  Third, Carville and Begala state that President George W. Bush and the Republicans supported cutting taxes that affect the wealthy, such as the federal income tax and the estate class (when the estate tax, according to Carville and Begala, really only impacts a small number of people, the very rich), while opposing a reduction in the payroll tax, which particularly impacts those who are not upper-income.

Carville and Begala admit that Republicans have run with the theme of simplifying the tax code, something that Carville and Begala believe that Democrats, too, should actually talk about.  But Carville and Begala maintain that Republican proposals for simplifying the tax code will make things worse, not better.  A flat tax, for example, would get rid of taxes on interest, dividends, capital gains, and inheritance, which in many cases affect the rich, while it would keep the taxes that middle-class people pay (payroll, sales, property, and excise taxes) and also hit the middle-class with an income tax (Dick Armey proposed twenty percent).  The national sales tax, according to Carville and Begala, would also shift the tax burden to the middle class.  Essentially, Carville and Begala believe that Republicans support a tax code that is biased against work.  On page 264, they contrast those who "work for a living" with "someone whose money comes from sitting on his rear end and cashing dividend checks." 

Carville and Begala refer favorably to the Center for American Progress' tax-reform proposal.  This proposal would treat "all forms of income alike" (Carville and Begala's words)----capital gains, dividends, wages, tips, interest, etc.  Those making up to $25,000 a year would pay 15 percent, those making between $25,000 and $120,000 would pay 25 percent, and those making over $120,000 would pay 39 percent.  The payroll tax would be abolished for working people, yet employers would pay it, and it would not be capped at $90,000 a year.  The Alternative Minimum Tax, which even hits the middle-class because it was not indexed for inflation, would be eliminated.  The per-child tax credit would be retained, expanded, and increased, and it would be extended to "folks who make as little as $5,000 a year" (Carville and Begala's words on page 265).  And $30 million in loopholes that corporations and the wealthy use will be closed.  As Carville and Begala say on page 264, Democrats should "shift the debate away from the old charge that Democrats are for higher taxes and on to the more relevant and salient debate over who pays."

Here are some of my reactions:

1.  I agree with Carville and Begala that it's simplistic to make a blanket assertion that Democrats are for higher taxes, whereas Republicans are for lower taxes.  I don't necessarily concur with every argument that they made to support that point, however, for their statement that a flat tax would retain sales and property taxes seems to ignore that the sales and property taxes are not federal and thus the U.S. government has no jurisdiction over them (though, as Carville and Begala note, people should be able to deduct their state and local taxes off of their federal tax returns), plus there is a history of conservative opposition to property taxes and support for the per-child tax credit.  But I find Carville and Begala's overall point to be sound, especially since a number of Republicans (including John McCain) supported raising the tax on employer-provided health insurance.  My impression is that Republicans are sometimes very revenue-conscious when the revenue is coming from the middle-class, but they are quick to support tax cuts on taxes that the upper-income pay.  See my post here.

2.  I have some issues with Carville and Begala's apparent disdain for investment (or so it comes across to me, and I'm open to correction).  Does not investment build companies and create jobs?  Why not, therefore, support tax cuts for business investments?  Carville and Begala, in talking about a national sales tax, refer to proponents' point that it would encourage savings and investment.  People wonder why we should cut taxes on the rich, when they would just sit on their money.  Well, them sitting on their money may entail them putting it into stocks, which builds companies.

3.  And yet, I am intrigued by the Center for American Progress' proposal that all sources of income should be taxed progressively.  Rather than, say, raising taxes on capital gains and dividends, why not just take income in its entirety and impose a rate on that?  I have questions about this proposal, though.  First of all, would that amount to an increase or a decrease in taxes on capital gains and dividends?  I can see it being an increase, since capital gains and dividends would then be treated as income.  On the other hand, I can picture it being a decrease, since there's a rate that taxes one's entire income----and that income is not just from capital gains and dividends but from other things as well.  Second, would not CAP's proposal increase the tax burden on lower-income people, since they would pay 15 percent?  Or would the deductions, such as the per-child tax credit, wipe that tax out?

4.  I've heard Republicans and conservatives argue that the per-child tax credit for the lower-income is technically not a tax cut for the reason that the lower-income do not pay taxes: thus, it's not a tax cut, but money from the government.  And Republicans and conservatives have used this as an argument against the per-child tax credit for the lower income.  I don't know enough about this issue to comment.  I think that it's a good idea for the lower-income to get some relief, or help, however.