READ MY LIPS

Read My Lips: We Need These Taxes
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/04/AR2008060403270_2.html
By Roger Lowenstein
Let's imagine an alternate universe. The U.S. government is running a large and growing deficit. Not far down the road it faces huge increases in Social Security and Medicare costs. Naturally, the candidates for president want to remedy this by raising revenue. They don't want us to bequeath bigger deficits to our children or stake our future on foreigners' willingness to keep lending us money.
But have you heard this speech? "My fellow Americans, I have a plan to raise taxes so that the budget will be closer to balance and future Americans won't have to worry about their retirement security." Neither have I.
Somebody, though, should be giving it. The U.S. budget deficit will be $400 billion -- or 3 percent of the gross domestic product -- this year, according to the Center on Budget and Policy Priorities. And it's growing. A gas-tax "holiday" (as advocated by John McCain) or a middle-class cut in the payroll tax (candy from Barack Obama) are pandering and will only make things worse. How would a conscientious president deal with the deficit and also make the system fairer? Here are five relatively painless ways.

1. End preferential treatment for private equity fund managers.
When you and I earn ordinary income, we pay a maximum rate of 35 percent in taxes. The max for private equity fund managers is 15 percent. This includes folks like Stephen Schwarzman, the head of Blackstone, whose net worth has been estimated at $7.8 billion and who (when he's not in St. Tropez or sundry other vacation digs) lives in the former Park Avenue apartment of John D. Rockefeller Jr.

Why do fund managers pay less? To encourage investment, the tax system charges a lower rate -- 15 percent -- on capital gains. No one objects to fund managers paying that rate on the profits they earn on their own capital. But here's the rub: Most of their profits come from investing other people's money. Typically, for every dollar their investors earn, the managers take a 20 percent cut. This is, in effect, a fee -- or ordinary income. Why shouldn't a Schwarzman or a Henry Kravis of Kohlberg Kravis Roberts & Co. be assessed the same rate on their fee income as anyone else? And since this wouldn't affect the people putting up the money, it would have no effect on total investment or economic growth. This change would raise only $3 billion a year, but on simple fairness, it's a must.

2. Raise the cap on the payroll tax.
Social Security is financed by a 12.4 percent tax, but it's assessed only on the first $102,000 of income. So people who earn more than that amount pay a lesser share of their total income. Warren Buffett, currently the richest American, has noted that his secretary is taxed at a higher effective rate than he is. Since income disparities are growing (the top 1 percent of earners took home 23 percent of all income in 2006, the highest total since just before the 1929 stock market crash), more and more income is escaping the tax. And Social Security needs the money: Its benefits will eclipse payroll tax revenues by 2017 (after that, the system will have to reclaim money it has lent to the rest of the government; eventually it won't have enough). Raising the cap would help preserve benefits. There are many ways to do this. Obama favors extending the tax on the wealthy -- perhaps on incomes above $200,000. More simply, we could raise the current ceiling.

3. Reinstate a meaningful inheritance tax.
The Republicans won a rhetorical debate by labeling the inheritance tax a "death tax" -- the very phrase conjures up an image of heartless bureaucrats dragging the elderly from their beds to settle up, depriving them of their final moments of peace. In reality, the tax is paid not by the dying but by their living heirs. Prior to President Bush's tax cuts, which called for a gradual phaseout, the inheritance tax was levied only on estates worth more than $600,000, or 2 percent of the total. By next year, the floor will rise to $3.5 million -- at which point only one-third of 1 percent of estates will be taxed.
The tax is due to be repealed in 2010 -- and then restored in 2011 (a gimmicky flip-flop that Congress approved so that the projected deficit wouldn't seem astronomical). Congress is certain to revise the inheritance tax during the next administration. Reverting to half the pre-Bush level, as compared with total repeal, would net the government $40 billion a year.

The justification for this tax is that while the country allows -- and encourages -- citizens to accumulate great wealth on Earth, some of that fortune should be redirected to society once they enter the hereafter. The practical argument is also important: Repeal of the estate tax would be a death knell to charitable contributions and to this country's unique network of private foundations.

4. End unfair deductions.
First, the mortgage deduction. Sounds crazy, like banishing apple pie, right? But why should the government subsidize homeowners, who on average are far wealthier than people who rent? The home-mortgage deduction costs the United States more than $75 billion a year -- with half going to the richest 12 percent of taxpayers. And the evidence that it leads to higher home ownership is sketchy. More likely, it marginally raises home values. Given the real estate slump, propping up prices may seem like a good thing. But sooner or later -- as the recent crash should make clear -- prices return to their economic value anyway.
The mortgage deduction's true effect is to encourage people to borrow more on their homes. Haven't we had enough of that? A similarly unfair deduction, which McCain favors repealing, involves corporate health-care plans. If your company has a plan, you don't get taxed on the benefits. This costs the Treasury a whopping $125 billion a year and unfairly penalizes people whose employers don't have plans. Repealing these two deductions would eliminate almost half the deficit. Or the Treasury could replace them with a credit distributed evenly to all residents and all health-care consumers.

5. (Best for last): Repeal the Bush cuts in income and capital gains taxes.
They mostly benefited the wealthiest Americans, and this would save $2.5 trillion or so over a decade. The argument against the cuts hasn't changed, but now the evidence is in. In the 1990s, the U.S. economy boomed, and the government achieved a budget surplus. In this decade, growth has been slower; the surplus -- which the tax-cutters predicted would last indefinitely -- was gone within a year. Reversing the cuts (a step Obama and Clinton favor) would raise the top rate on ordinary income to 39.6 percent from 35 percent. It would also raise the capital gains rate to 20 percent. Wall Street frets that the latter would stymie investment. But the rate was 20 percent in the '90s -- probably the stock market's best decade ever.
I said that these hikes would be relatively painless. Since all taxes cost somebody money, you could say that every hike is painful. But not having money for retirement benefits or for health care for kids or for cities leveled by hurricanes or for defense and national security is also painful. The real questions should be: Would these hikes cause unfair pain to those being taxed, and would they cause more than marginal distress to the overall economy? The overwhelming answer is no.
Roger Lowenstein is the author of "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis."