Wesley Clark's Tax Plan Jude Wanniski January 7, 2004

Memo To: Rep. Charlie Rangel [D NY]
From: Jude Wanniski
Re: A Few Problems

When I read the stories in the NYT and Wall Street Journal yesterday about Wesley Clark’s proposal for a “simpler and fairer and more progressive” tax system, I had to assume he never bothered to consult you, Charlie. Here you are, the most important Democrat in Washington on matters relating to tax policy – ranking Democrat on the House Ways & Means Committee. I thought for sure you would be advising him directly after you became the first big hitter in the Democratic Party to endorse his candidacy, which seemed to be a signal that former President Bill Clinton was in his corner. I'm told General Clark never even bothered to have you look at his “plan” before he announced it. If he had, I’m sure you would have made some suggestions.

As the Times reported, the Clark plan would “eliminate federal income tax payments for families of four earning up to $50,000 and cut taxes for families with incomes of $1 million or more.”

The overall problem is that it is really only simpler for some of the taxpayers, those who he would drop off the tax rolls altogether at the bottom of income ladder, and those in the lower tax brackets. The tax code would become even more complex in the upper income brackets, which means more lawyers and accountants and lobbyists working the old loophole game. Tax reform should make it simpler for everyone that has to pay taxes.

Clark would push the top bracket back up to 39.6%, where it was when President Bush took office, and add a 5% surcharge on all taxpayers who have incomes over $1 million. This increase, he figures, will be able to offset the tax cuts to middle-income taxpayers. For one thing, Charlie, he figures the 5% surtax only adds five points to the marginal rate of 39.6%, or 44.6%, “the highest since 1986.” Actually it is much worse than that because a surtax is not added but multiplied. It amounts to a tax progression on a tax progression. I think the last time we had a surtax of this kind was in 1967, when Republicans pushed Lyndon Johnson into enacting a surtax to finance the Vietnam War. That was at a time when the top marginal rate was already 70%! It clearly weakened the stock market and the economy and produced less revenue than it was supposed to. It also helped President Johnson decide not to seek re-election. As part of his campaign, Richard Nixon promised to repeal the surtax.

Now don’t get me wrong. I would have no problem at all with a 40% top marginal tax on all taxable income in excess of $1 million. But you know as well as I do that you can’t do that while including capital gains or dividends as taxable income. They would have to be treated separately. Otherwise the government winds up grabbing a big chunk of an individual’s lifetime work, which shows up one time in his or her taxpaying life upon the sale of a business or a farm or ranch. It may sound nice to Democrats to run around saying the rich should pay more for the costs of government than they do instead of squandering their wealth on palatial homes and extravagant lifestyles. But General Clark does not realize that the government has not the slightest idea on how many Americans are worth $1 million or $10 million. Forbes magazine has a team that spends all year trying to figure out who the wealthiest 400 Americans are and how much they are worth. But the government only gets a clue to the wealth of all the rest of us when we die and face the federal death tax.

In other words, Charlie, Wesley Clark’s proposal is half-baked, and if he had to defend it in a debate with President Bush next fall, he would get all tangled up in its complexities. I really blame the economists who gather round Democratic politicians who are eager to play Robin Hood economics in attracting votes. You just can’t mix up “income” and “wealth” the way economists like Paul Krugman do when they yap about Republican “tax cuts for the rich” paid for by “spending cuts on the poor.”

Howard Dean, who seems headed for the nomination and might ask General Clark to be his running mate, has simply promised to undo the Bush tax cuts and use the money saved to pay for his health-insurance scheme. That would really send the stock market reeling, if he had a ghost of a chance of getting Congress to agree with it. I’m still waiting to see what Dr. Dean has in mind when he promises a “fairer and simpler” tax system, as he has been doing since last June. He could pull a rabbit out of his hat if he does it right. There are all kinds of ways to have a basic tax reform that would achieve the revenue goals of both political parties, but not on the track chosen by General Clark. Otherwise, I’ve been impressed with his campaign and broadly agree with him on national security, foreign policy and the war in Iraq. On taxes, he's a loser.