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Tax-cut politics works, system doesn’t

Marketplace Staff May 16, 2006

KAI RYSSDAL: There’s going to be a big ceremony at the White House tomorrow. The president will sign that $70 billion tax-cut that Congress passed last week. Actually, “cut” is kind of a misnomer. Really, it’s an extension of some capital gains and dividend cuts that were set to expire. So the White House says it’s preventing a tax hike Americans don’t want. That’s all well and good. But economist and commentator Len Burman says, the way the government spends money, we’ll have to raise taxes someplace else.

LEN BURMAN: If they could, many conservatives wouldn’t tax savings at all. They’d only tax spending.

They believe a tax on what you buy would discourage spending, boost saving, and help businesses to attract the capital they need to expand. That would boost economic growth.

Liberals are skeptical about the growth claims, and they really hate the idea of shifting more of the tax burden onto those who can’t afford to save.

Liberals would do anything to stop a consumption tax. But conservative rhetoric is also a barrier to tax reform.

Conservatives call legislators who propose new public programs “big government, tax-and-spend, liberals.”
No one wants to be stuck with that label, so both liberals and conservatives mask spending programs as tax credits and deductions.

The politics might work, but the tax system just doesn’t.

Meanwhile, the social safety net is frayed and ineffective: the tax programs just don’t fill the gaps.

Here’s a radical notion. How about relying on the tax system to raise taxes and on the spending programs to provide the social safety net?

Liberals would agree to replace the loophole-ridden income tax with a pro-growth tax system.

Conservatives would agree to well-designed expansions of the social safety net: Say, universal health insurance, fully-funded housing vouchers, and more education loans. That would offset the burden of a consumption tax on those of modest means.

I can almost hear the voice of Ronald Reagan saying, “There they go again.”

But we’re already spending billions on tax breaks that don’t work.

Let’s just call a spade a spade. Then we might get the social safety net that liberals have always wanted and the tax code that’s the Holy Grail for pro-growth conservatives.

It sure couldn’t be worse than the current system.

KAI RYSSDAL: Len Burman is co-director of the Urban-Brookings Tax Policy Center.

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