Is Democratic Tax Bill a Return to Carternomics?

Former Bush economic adviser Lawrence Lindsey does the math and makes the case.

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"We would actually have for more people higher tax rates than what we had under Jimmy Carter" is the way Lawrence Lindsey, former director of President Bush's National Economic Council, described to me what might happen if the tax reform bill from House Ways and Means Committee Chairman Charlie Rangel ever became law. Here is a bit more of our possible financial future as sketched to me by Lindsey, who now runs his own consulting firm and is also an economic adviser to GOP presidential candidate Fred Thompson—though Lindsey was speaking for himself and not any campaign:

Until very recently, there had been a growing bipartisan consensus, acknowledged at least implicitly, that you cannot run a high-tax [economic] regime and be competitive. The great unspoken fact is that [Rangel's 4.6 percentage-point surtax on high incomes] only looks like a restoration of [Clinton's tax rates]. But if the Bush tax cuts expire, the four-and-a-half points stays on top of the 39.6 [top Clinton tax rate]. So they are taking the rate to 44 percent. Then you add on 1.3 points [for the return of certain limits on tax exemptions], and if you are an entrepreneur another 2.9 points on top of that for the Medicare tax. So we are back to the 50 percent marginal rate under that plan.

What's more, if you eliminate the income cap on Social Security taxes—as some Democrats have proposed—Lindsey explains that "then we're 60 percent." The top tax bracket when Ronald Reagan took office in 1981 was 70 percent. Reagan then cut it down to 50 percent with the 1981 tax cuts and then to 28 percent with the 1986 tax reform package. "And remember," Lindsey continued, "$200,000 was the cutoff for the 70 percent bracket back then, which would be like $400,000 today. And they would be taking the 60 percent bracket to income levels well under half that number." Lindsey, who once wrote a fascinating book while at Harvard University about the Reagan tax cuts called The Growth Experiment, went on to joke that Dems were planning to run the "Shrinkage Experiment."

It's unclear, though, whether the Democratic presidential candidates want to run Rangel's economic science project. The Clinton campaign, for instance, has said only that it's "studying the proposal closely." Then again, some left-of-center groups have already called for a rollback of the Bush and Reagan tax cuts if the Democrats take the White House and keep Congress in 2009. As the liberal advocacy group Common Dreams said last August in a report, "When Reagan dropped the top income tax rate from over 70 percent down to under 30 percent, all hell broke loose. With the legal and social restraint to unlimited selfishness removed, 'the good of the nation' was replaced by 'greed is good' as the primary paradigm."

But how might higher taxes affect U.S. competitiveness in the global economy? Two interesting global comparisons via the Tax Foundation:

For the first time since the Tax Reform Act of 1986, the top combined (federal and state) marginal tax rate on individual income would climb above 50 percent under the Rangel plan. When the rate reaches that peak in 2011 with the expiration of the 2001 tax cuts, the U.S. will have the 7th highest individual income tax rate in the developed world. The U.S. currently ranks 21st in that comparison.... Chairman Rangel's proposal to cut the U.S. federal corporate tax rate from 35% to 30.5% would make the U.S. combined federal-state rate fourth-highest internationally, instead of second-highest, where it stands right now. The average OECD corporate tax rate, U.S. excluded, is 28.1%. In the OECD, only Japan's 39.5% rate is higher than the U.S. rate right now. The U.S. would leapfrog only Italy and Canada under Rangel's proposal.


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