Let's keep this tax thing in perspective. Suppose Congress and the White House decide to raise taxes $25 billion. That's less than a 2.5 percent increase in overall federal taxes. Suppose that ultimately another $25 billion is needed to close the budget deficits. The total still represents less than a 5 percent increase. No one likes to pay higher taxes, but these amounts won't impoverish most Americans or cripple the economy.
How will we get hit? Higher "sin" taxes on cigarettes, beer and liquor seem likely. So are steeper "user fees" for, say, airline passengers. The impulse of Democrats and Republicans alike is to construct a package of many small -- and highly technical -- increases so that no one sees much impact. The budget summit should do better than that.
It should not just raise taxes but should do so in a way that makes the overall federal tax system fairer and more efficient. How about a "carbon tax": a tax on oil, natural gas and coal? This would depress energy use, air pollution and emissions that contribute to the "greenhouse effect." How about taxing capital gains (the profits on the sales of stock or other assets) when people die? Closing this loophole, which benefits mainly the wealthy, could raise at least $2 billion to $3 billion a year.
As they go about this political drudgery, the White House and Congress should adhere to three guidelines:
First, keep income-tax rates low. A tax system with high rates and many special tax breaks (credits, deductions, income exclusions) invites abuse and waste. Hordes of tax lawyers and accountants are deployed to help people and companies minimize their taxes. Investment decisions are skewed by tax breaks. The 1986 tax-reform act was an attempt to get away from this sort of system by lowering tax rates and eliminating some tax breaks. We shouldn't backtrack on it.
One bargain that's being talked about is a bad one. It would have congressional Democrats accept the Bush administration's cut in the capital-gains rate, while the White House would allow the top income-tax rate to be pushed up to, say, 33 percent for the richest Americans. This would give the rich a break with one hand and take it away with the other. There's no evidence that a lower capital-gains rate would increase jobs or investment. But it would spur frantic efforts by the rich to convert ordinary income into capital gains. The higher tax rates go, the more reason people have to seek tax shelters or, more insidiously, lobby for new ones.
Second, spare the poor and lower-middle class. Indeed, they should get some tax relief, because their incomes have stagnated. Between 1980 and 1988, the average income of the poorest fifth of families dropped slightly from $5,490 to $5,424 (in inflation-adjusted "1988 dollars"), reports a study by the House Ways and Means Committee. Incomes for families in the second fifth rose from $14,012 to $14,311. Meanwhile, the average incomes of the wealthiest fifth rose from $62,864 to $72,759. Protecting these people from new taxes is not just a matter of fairness or decency. Squeezing their incomes lessens their chances of making it on their own -- and increases the chances they'll end up on welfare, homeless or in jail.
Third, remember that some taxes do good things. It's in everyone's interest to reduce air pollution, greenhouse gases, oil imports and traffic congestion. The case for a "carbon tax," or something like it, is that the broader social costs of energy use aren't fully reflected in today's fuel prices. Likewise, the case for raising taxes on beer, wine and liquor is that too much drinking -- which presumably would be discouraged by higher prices -- causes more car accidents.
Anyone can concoct a tax package with the help of a fat volume of suggestions from the Congressional Budget Office (the official title, "Reducing the Deficit: Spending and Revenue Options"). Doubling the cigarette tax from 16 to 32 cents a pack would raise about $2.8 billion annually. Increasing the airline-ticket tax from 8 to 12 percent would raise about $3 billion. The trick will be creating a package that's both sensible and fair.
For example, higher excise taxes would hurt lower-income people most because the taxed items (fuel, cigarettes or alcoholic beverages) typically represent a larger proportion of their expenses than for higher-income people. So any excise-tax increases ought to be accompanied by income-tax cuts for people in the lowest brackets. That would require a bigger tax increase on someone else.
No tax increase is painless. A "carbon tax" has predictably offended the coal companies that would be hit hardest. A proposal by Rep. Fortney (Pete) Stark, Democrat of California, would impose over five years a tax of $15 per ton of coal (equal to about 50 to 70 percent of today's price), $3.25 per barrel of oil (or about 8 cents a gallon) and 40 cents per thousand feet of natural gas (equal to about a 7 percent retail-price increase). Coal is most affected because its carbon emissions are highest; the industry foresees big job losses.
As these matters are debated, there are two misconceptions to avoid. The first comes from liberals, who -- having condemned budget deficits for a decade -- now envision huge benefits from eliminating them. In fact, the possible gains (primarily more investment) are quite long-term and could easily be squandered if bad tax increases support wasteful spending. The conservatives' misconception is that burdensome new taxes will permanently destroy the economy's capacity to grow. Conservatives should have more faith. The economy's underlying vitality is strong enough to withstand modest new taxes.
Balancing the budget is the best way of disciplining government. It ensures that spending is important enough to justify taxes. If the budget summit does its work well, it should be able to produce a tax package that not only is fair but ultimately makes the nation better off.