The Tax Man... or Woman

April 11, 2008

By Morley Winograd

Under the next administration, issues such as universal access to health care, improvements in public education, and investment in green technologies to reduce our nation’s dependence on foreign oil will require major new expenditures by a government already facing almost a half-trillion-dollar annual budget deficit, and soon to face “fiscal bankruptcy” as Medicare and Social Security entitlement spending outstrips available revenue. With the large, active and technologically sophisticated millennial generation leading the push for such new programs, whoever is elected president in 2008 will have no choice but to find new sources of revenue to pay for it all.

Senators Clinton and Obama have both made it clear that they will let the Bush tax cuts on upper-income taxpayers (those earning more than $250,000 per year) expire as scheduled in 2010, as the most politically palatable source for such new revenues. This would raise the tax rate for earnings over this amount to 39.6 percent, the level during the Bill Clinton presidency.

But Obama has gone further, suggesting that he would also eliminate the payroll tax on Social Security recipients earning less than $50,000, while raising more money for Social Security by eliminating the current cap on earnings subject to the tax. Similarly, he advocates a tax cut for middle-income taxpayers and raising the capital gains tax rate; this is all designed to begin the process of redistributing the relative burden of taxation between Americans. This redistribution approach is particularly appealing to millennials, who are motivated to do something about the growing economic inequality in America.

Senator Clinton has been more circumspect on plans for shifting the tax burden, possibly because she is so much more dependent on the contributions of wealthier Americans to fund her primary effort than Senator Obama is.

Meanwhile, Senator McCain has begun his economic education by becoming a student of leading supply-side politician and former Congressman Jack Kemp. McCain originally voted against the Bush tax cuts out of concern over their impact on the budget deficit, but he is now advocating that they be made permanent, as part of his overall plan to shrink the deficit through lower taxes, smaller government and the elimination of pork-barrel spending.

However, a recent story in The New York Times reported that, in contrast to the results predicted by supply-side economic theory, the Bush tax cuts have led to a sharply lower rate of per capita income tax revenue and to lower overall tax revenues. This result is unsuited to this era’s desire for a more activist federal government.

If elected, Senator McCain will be forced to negotiate a series of tax increases — however they are defined or characterized — with the ascendant Democratic Congress in ways that millennials, the new force in American politics, determine to be fair for all. The net result will be the reduction of economic inequality through the policies of an expanded federal government.

Morley Winograd, former senior policy adviser to Vice President Al Gore, is executive director of the Center for Telecom Management at the USC Marshall School of Business. He is co-author of Millennial Makeover: MySpace, YouTube and the Future of American Politics.