October 21, 2004

Why Taxes Have to Go Up

Last May, this page called on the presidential candidates to engage in a serious debate on the federal budget deficit, now $415 billion, compared with the $236 billion surplus when President Bush took office four years ago. What has emerged instead is a pair of dueling tax plans, each of them inadequate to support its candidate's vision of government.

President Bush is fixated on making his ill-conceived tax cuts permanent and creating new tax shelters for affluent investors. Senator John Kerry's tax agenda raises money for the government by repealing Mr. Bush's tax cuts for high-income earners, an idea we applaud. But he has promised away everything he'd save for worthy, but expensive, new initiatives. The Concord Coalition, a nonpartisan group, estimates that the stated policies for a second Bush term would result in a slightly larger deficit over 10 years than Mr. Kerry's plan.

Both candidates, unfortunately, are operating on a similar premise: that nothing need be done now to avert the looming dangers of the nation's huge financial imbalances. As long as Social Security and Medicare aren't belly up, the dollar isn't plummeting, interest rates aren't spiking, and economic growth isn't tanking - that is, as long as any consequences of mushrooming deficits have not yet materialized - each candidate seems determined to push forward with an agenda that avoids asking Americans to pay for what the government provides.

That neatly avoids annoying voters during the campaign season, but it's perilously shortsighted. The United States carries the biggest deficit and debt loads among the world's advanced economies, borrowing a daily $1.7 billion from abroad, mainly from China and Japan. As a result, the economy, which is increasingly viewed by outsiders as cooling off and hobbled by deficits, runs the ever greater risk that foreigners may decide they are not willing to lend or, worse, may decide to sell off large chunks of their $10 trillion in United States assets.

Either could provoke a crisis by causing interest rates and prices to rise sharply and the economy to falter.

Economic doomsaying? Hardly. This week, the Treasury Department reported that in August, monthly investment in the United States from the rest of the world fell for the sixth time this year, with private investment falling by half and financing by central banks rising just enough to cover the American trade imbalance. Even without a sudden deterioration, the continued accumulation of foreign debt will erode prosperity over time. To grasp the problem, consider that the child credits or other tax breaks you enjoy today are in effect a loan from, say, China, through the United States Treasury to you. Your progeny will pay the interest forever.

The fundamental fix for all this is deficit reduction. A substantial amount of revenue can - and should - be raised by reversing Mr. Bush's tax cuts for the wealthy, generally defined as the top 2 percent of taxpayers, as well as by retaining and reforming the estate tax. But that won't be enough to make real progress, especially if, as Mr. Kerry proposes, the money is used to provide health insurance and other benefits. Thus, a serious attempt to tame the deficit must put on the table the option of reversing the Bush tax-rate cuts further down the income ladder. If the pre-Bush tax rates were restored for the top 25 percent of taxpayers, a vast majority of filers - in the 15 percent tax bracket and below - would still be shielded from an increased burden.

The next president and Congress should also raise money from alternative sources so income taxes and spending cuts are not the only way to reduce the deficit. A good place to start would be an increased federal gasoline tax and a new tax on industrial carbon emissions, greenhouse gases that lead to global warming. Each tax change would pull triple duty by raising revenue, reducing dependence on foreign oil and helping the environment.

Of the two candidates, Mr. Kerry is more credible on deficit reduction. The tax breaks he contemplates are not as grandiose as Mr. Bush's. More important, unlike Mr. Bush, he has said that he will require Congress to pay for new tax cuts and spending increases by saving money elsewhere in the budget.

These are no small matters. The greater the president's fiscal credibility, the greater the confidence of lenders and financial markets. Still, the leader who restores the nation's fiscal health will need to do more than has been put forth during this campaign, or risk being forced to act by circumstances beyond his control.

Campaign 2004/The Big Issues: Editorials in this series remain online at nytimes.com/issues.

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