The Wall Street Journal-20080117-Republicans and Taxes
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Republicans and Taxes
As the rugby scrum that is the Republican Presidential race heads to South Carolina, the players are wrestling on conservative turf. So it's a good time to wrestle ourselves with an issue that has become a conservative signature -- taxes.
The good news is that all of the GOP candidates want to make the Bush tax cuts permanent, and each is talking about some kind of new tax cut or reform. Rather than burying Reaganomics, as many in the media want to do, these candidates are trying to update it for our current economic challenges.
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The latest bidder is Rudy Giuliani, who last week offered his plan to cut taxes by $6.3 trillion over 10 years. The former New York City mayor wants to cut the corporate income tax rate to 25% from 35%, bringing that rate close to the average of our major trading partners. Mr. Giuliani would chop the capital gains rate to 10% from 15%, and he'd allow capital gains to be indexed for inflation so investors no longer paid tax on phantom gains. He'd also index the Alternative Minimum Tax (AMT) for inflation, and on top of all this he wants to create a one-page, 11-line tax return that would eliminate most deductions and tax credits and install three lower rates of 10%, 15% and 30%.
Filers would have the option of choosing this "fast form" or the current code with its 13,000 pages of rules. Mr. Giuliani would retain the mortgage and charitable deductions on his alternative tax form, no doubt because he fears their political power. In this sense, his plan is inferior to Fred Thompson's optional flat tax (two rates: 10% and 25%), which is the simplest and best reform in the field. But Mr. Giuliani's ideas are a big improvement that would boost the economy.
Messrs. Thompson and Giuliani are also the best in the field at explaining how taxes affect an economy. They understand incentives and aren't cowed by Democratic arguments that tax cuts favor only "the rich" and produce deficits. Asked at a recent debate whether tax cuts lead to an increase in tax revenue, Mr. Giuliani responded that some tax cuts do and some don't. He's exactly right: Tax credits and rebates, the latest fad, lack the bang for the buck that marginal rate cuts offer.
As for the other candidates, we're told that John McCain is rolling out his tax reform today. It would also cut the corporate rate to 25%, provide immediate expensing for new equipment, and replace the R&D tax credit that expires annually with a credit equal to 10% of wages spent on R&D. He'd also eliminate the hated AMT. This is a welcome and significant conversion for Mr. McCain from his run in 2000, when he opposed tax cuts as a matter of economic principle.
The Arizona Senator is still insisting that any tax cuts be "paid for" with spending reductions, which sounds good but could let Democrats block his tax cuts merely by refusing to cut spending. The better policy and politics is to cut taxes first, while doing one's best to slow spending growth. A growing economy will shrink any deficit.
Meanwhile, Mitt Romney is proposing to expand tax free savings accounts and he speaks vaguely of cutting tax rates. That's fine with us, though in his typical fashion it seems like the path of least polling resistance. For all of his talk about "changing" Washington, Mr. Romney so far hasn't offered a tax reform that would reduce the sway of lobbyists and money changers.
Mike Huckabee is the most unusual, combining an anti-corporate message with the most radical reform of all -- the so-called FairTax, or a 30% national sales tax that would replace all federal income and payroll taxes. We have our doubts that such a root-and-branch upheaval could ever pass Congress, even if it did survive a Presidential campaign.
It is fashionable in some media quarters to proclaim that this GOP tax message is tired. And it is true that cutting income tax rates has lost some of its political punch now that nearly half of all Americans pay no income taxes at all. This is due in part to the victory of cultural conservatives who've pushed the child tax credit and want to use the tax code as social policy. We've been willing to accept such credits as the price of passing something in Washington. But they are no substitute for the pro-growth rate cuts most of these candidates are proposing.
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With Democrats insisting on a giant tax increase, taxes will be a major issue this fall no matter who wins the GOP nod. And if a Republican does win the White House, a tax reform showdown is inevitable in 2009. The AMT continues to swallow more taxpayers, the death tax is due to expire for a single year in 2010 and then rise back to 55%, and the Bush tax cuts expire after 2010. This is a perfect storm that means the next President will have no choice but to make taxes a political priority.
It also presents the best opportunity for major tax reform since the 1980s. Even if Democrats retain Congress, Charlie Rangel will run House Ways and Means and he seems open to lower tax rates in return for a broader tax base. Republicans are right to make tax reduction and reform a major campaign theme, and voters who really do want to shake up Washington should consider who'd be best for that job.
