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The tax attack

Republicans think they've hit pay dirt with their crusade against the tax code and the Internal Revenue Service. And perhaps they have. But Democrats should pay particular attention to this irony: The +political resonance of the flat tax is rooted in public concerns over simplicity and equity.

And those should be liberal issues.

How is it that Dick Armey can exploit middle-class anti-tax resentments to support a proposal that would increase taxes for the lower 95 percent of taxpayers? How, indeed?

Democrats don't get it. But it's not really such a mystery. The public is frustrated with a tax code so complicated that people worry they've broken a rule without even knowing it _ a tax code so riven with shelters and loopholes that people are convinced that, whatever it says on the surface, the wealthy are manipulating it to pay little or no taxes.

So when Republicans pitch their flat tax proposal, the Armey-Shelby bill, as a tax simplicity measure _ everybody pays one simple rate, no complicated forms, no special loopholes, and so forth _ it's not surprising that people listen. When Dick Armey and Bill Archer castigate the tax code for being ""riddled with special-interest loopholes" and letting "some people earning more than $200,000 a year pay no taxes at all," it's not surprising that people can't see the dishonesty of contemporary flat tax rhetoric.

Dig around in the pamphlets supporting the Armey-Shelby flat tax bill, and you'll find the standard lines about supply-side economics. But the bill's sponsors know that these make for very bad politics, because the flat tax would leave the rich paying less and the poor and middle class paying more. So they make the pitch on the basis of tax simplicity. Everybody pays one low, simple rate _ no complicated forms, no special loopholes, and so forth.

The aim here is to conflate tax progressivity with complexity, even though there is no real connection between the two. As countless Democrats rightly point out, it would be just as easy to "simplify" the tax code by creating four or five graduated tax brackets and eliminating most, or all, deductions. That's simple, straightforward and progressive.

But if this is true, then why do Democrats always have to get stuck saying "Me, too" when Republicans push tax simplicity? Why, indeed?

Democrats, after all, have no ideological commitment to the tax code's complexity. Their interest is in a tax code that raises revenue in a progressive fashion.

Consider how different the politics of the flat tax would be if, instead of the current tax code, we had a tax code with minimal deductions and five brackets at 10 percent, 20 percent, 26 percent, 32 percent, and 34 percent. Let us further assume that 75 percent of the population fell into the lowest bracket at 10 percent. How much political traction would Dick Armey get if he proposed cutting the three upper brackets down to 20 percent and making up the shortfall by raising the lowest bracket from 10 percent to 20 percent? Probably not much.

But that just makes the point: the complexity of the tax code is the enemy of progressive taxation. The fact that so much of it remains hidden in a murky netherworld of complex deductions, payroll taxes, and differential rates of taxation on various forms of investment allows Republican politicians to campaign against taxes in general while actually shifting the tax burden from the wealthy to middle- and lower-income taxpayers.

The problem is that Democrats tend to see the tax simplicity issue too much in tactical terms. If the Republicans have their proposal for tax simplicity, the Democrats have one too _ and they can do it while maintaining tax equity. There is, in fact, a Democratic proposal that does just this: the hypothetical progressive tax I set forth above is actually House Minority Leader Richard Gephardt's "10 percent Plan."

Gephardt deserves real credit for putting his plan on the table. But fundamentally he is still playing catch-up. Tax simplicity should be more than a rhetorical dodge Democrats use to outflank the Republicans in their drive for the flat tax. It should be central to all Democratic strategy on taxes. Liberals need to make the tax simplicity issue their own.

Liberals sometimes become so used to grappling with anti-tax agitprop that they lose touch with the fact that certain taxes really are burdensome to middle-income wage earners. Partly because of this, they place far too much emphasis on how conservative policies inordinately help the wealthy. That's a crucial part of the story; but it leaves the story half untold. It may be clear to tax policy analysts that every dollar not paid by corporation X or wealthy individual Y must be made up either in more revenue from lower-income taxpayers or by cuts in government programs. But that's a distant logic for the average taxpayer.

Democrats are at their strongest when they demonstrate the connection between breaks for the wealthy and added burdens on the middle class in the form of benefit cuts or tax hikes _ and vice versa. The capital gains tax cut is a possible example. The capital gains tax itself is simply not politicized to anything like the degree that marginal income tax rates are. Even the term "capital gains" seems perfectly designed to obscure exactly what is being talked about. In last year's tax debate, there was a well-mobilized constituency _ investors, brokers, and their intellectual allies _ who cared passionately about capital gains cuts. There was no mobilized constituency on the other side, and the White House simply rolled over for most of the Republican plan.

As long as capital gains taxation remains distant from the concerns and everyday experience of ordinary Americans, it will never truly resonate as a political issue. Perhaps Democrats should borrow a page from the GOP playbook and come up with their own version of the ""marriage penalty" or the "death tax." The rate of taxation on capital gains is, after all, the rate of income tax on a certain kind of investment income. So it's really an investment income tax rate. The differential between the rate of tax on investment income (less) and wage and salary income (more) amounts to a penalty on wage and salary income. In fact, it is doubly penalized if we consider that wage and salary income is taxed by the income tax and the payroll tax. Liberals might get more political traction if they reframed the debate about capital gains taxes around the "wage earners' tax penalty."

But rather than getting caught up in debates over how much to cut the capital gains tax, liberals should be focusing on providing relief from those taxes that are most burdensome to working- and middle-class families. It is an open secret that the payroll tax is the most regressive portion of the federal tax code, and yet it remains curiously non-politicized. To contest tax policy on the narrow ground of the income tax while ignoring the payroll tax is craziness. Liberals need to put the payroll tax on the table.

Of all the statistics that tax policy analysts quote today, none is more significant than this one: 72 percent of American households pay more of their income in payroll taxes than income taxes. That's a shocking statistic. The progressivity of the tax structure is quickly becoming no more than a statistical illusion for the vast majority of Americans.

Sen. Edward M. Kennedy has recently proposed a modest reform of the payroll tax. As it now stands, the Social Security portion of the payroll tax combines contributions of 6.2 percent each from employee and employer. But the tax only applies to the first $68,400 of income. So the higher your income goes over $68,400, the lower the effective rate of payroll tax you pay. The Kennedy proposal would remove the $68,400 cap and use the additional revenue to fund a rate reduction from 6.2 percent to 5.3 percent.

The Kennedy plan is a modest but important step, and it runs counter to the liberal orthodoxy that any departure from the current payroll tax regime would threaten the universal character of Social Security and put it in political danger. Though it is reasonable to assume that public support for Social Security would fall dramatically if it changed from a program of universal social insurance to one of cash assistance to the elderly poor, it's not at all clear that the same problem would follow from changing the funding structure. In fact, switching to a more progressive funding method is far less likely to damage Social Security than the increasingly burdensome taxes on working- and middle-class wage earners that will be required to keep funding it as we have been.

Progressive tax reform is good politics, but not easy politics. Giving middle-income wage earners a break on payroll taxes would require rethinking some important orthodoxies about Social Security and universal entitlements. Radically simplifying the tax code would raise howls from countless constituencies who would lose their pet deductions and preferences. But vibrant political movements find creative ways to transcend problems such as these. Only moribund movements allow themselves to become so hobbled that they become easy marks for their political adversaries. Liberals need to shake their political timidity on taxes and start widening the debate to encompass those areas of tax policy where they have natural advantages.

It's important not to overestimate the importance of such changes in the tax code. Tax equity, after all, is a start, not a solution. The solutions to rising economic inequality and social insecurity will be found in broader structural reforms _ reforms in labor laws, in universal health care, in a new generation of social investments. But if Democrats cannot solve the problems of America's working families by changing the tax code, they can at least avoid the blame for working against their interests. If a regressive tax system keeps generating anti-government revolts, there will neither be the means to finance social outlay nor legitimacy for government intervention. Democrats should never be left holding the bag for the IRS or defending the payroll tax. The liberal failure to speak for the frustrations of the common American on tax policy tarnishes liberal credibility on other issues, and it impeaches government as an agent of popular change.

American Prospect Inc.

Joshua Micah Marshall is associate editor of the American Prospect magazine. This commentary is adapted from the magazine's May-June issue.

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