Choose Your Remedies
WHAT'S NOW ON THE TABLE
Help for the Middle Class
One plan would cut at least 2% from the FICA payroll taxes, which take 15.3% (employers pay half) of all earnings up to $53,400 a year. The tax is highly regressive, and its surpluses are used to pay for everything from food stamps to nuclear missiles.
Outlook:
Pushed hard by Democrats on grounds of fairness; a modest version may wind up in Bush's package as well.
A Break for Capital Gains
Taxed as regular income at rates up to 31%, most types of capital gains would get a substantial break if the Administration has its way. Republicans tout the measure as a stimulant to investment; Democrats attack it as a handout to the wealthy.
Outlook:
As part of a compromise package, Democrats may be willing to accept a limited cut, especially if it applies only to new investment.
Expansion of the IRA
As a boon to the upper middle class, several plans would restore tax breaks for Individual Retirement Accounts to the higher-income taxpayers from whom they were taken in 1986. Another version would allow withdrawal of earnings from accounts funded with after-tax dollars.
Outlook:
Popular with both parties, but the multibillion-dollar cost could be a barrier.
A Revived Investment Tax Credit
Dropped in 1986, any tax credit would probably be limited to investment in new plants and equipment and made temporary, thus encouraging companies to accelerate their expansion before the tax break expires. Moreover, to avoid giving a windfall to any spending that was already planned, the credits would probably apply only to "incremental" investment, meaning the money spent above a company's historical level.
Outlook:
A long-standing favorite of Democrats and a probable component of Bush's package as well.
Hitting the Wealthy Harder
To help finance middle-class relief, the rich would get some form of modest increase. One way would be to boost the top marginal tax rate a few points; another would be to add a surtax on millionaires' income.
Outlook:
In an election year, the Democrats will demand this populist move, and Bush is likely to go along in exchange for a capital-gains cut and other measures.
WHAT SHOULD BE DONE FOR THE LONG TERM
Invest in Mass Transit
Create federal, state and local partnerships to build light-rail lines for urban areas lacking mass transit; support high-speed rail for passengers and freight. To help pay for it, boost taxes on parking and fuel. Such programs would reduce pollution, gridlock and dependence on oil imports.
Invest in Education and Job Training
Guarantee access to college or vocational training for all who qualify, regardless of ability to pay. As Arkansas Governor Bill Clinton suggests, let needy students pay for their education with public service after graduation or through small paycheck deductions.
Boost Research and Development
Increase spending, as Bush has begun to do, to support private research into new technologies. Provide special funding for research into alternative energy sources including solar electricity.
Make Smart Defense Cuts
In the short run, reductions in the Pentagon budget will provide few savings. Because of the recession, for example, cutbacks in military payrolls would put more people on the unemployment line. But over the long haul, carefully planned reductions could amount to savings of $50 billion a year.
Phase Out Subsidies for Borrowing
Americans for decades have bought far larger and more expensive houses than they could otherwise afford, thanks to the deduction for mortgage interest. The result for the U.S. is high household debt and low savings. Lawmakers should consider sharply lowering the cap on mortgage deductions, which currently allows full deductibility for interest payments on debt of up to $1.1 million on two homes.
Similarly, the Treasury Department should release its long-awaited study on ways to equalize the treatment of corporate debt and equities. The best way is simply to cut tax deductions for corporate borrowing while simultaneously cutting the double taxation of stock dividends.