Taxing Decision Bush, Kerry present stark decisions for America’s electorate

By Jim Bodor TELEGRAM & GAZETTE STAFF

During a campaign stop in New Hampshire in February 1988, then-candidate George H.W. Bush made an infamous pledge: "Read my lips: No new taxes," he said.

He repeated the pledge at various events in the next few months, making it a mantra of his run for the presidency.

Two years later, on June 26, 1990, faced with a growing deficit and a sluggish economy, then-President Bush issued a statement calling for, among other things, "entitlement reform, tax revenue increases and discretionary spending reductions."

The media immediately pounced on the statement as a reversal of Mr. Bush’s earlier promise. Two years later, it was widely regarded as one of the top reasons why Mr. Bush lost the presidency after one term to a youthful Arkansas Democrat named Bill Clinton.

The episode stands as a reminder of why taxation is one of the touchstone issues for American voters, the kind of singular issue that can determine the outcome of an election in a blink.

This year, both voters and the candidates have been more preoccupied with the issues of terrorism and the wars in Iraq and Afghanistan. But taxation continues to run a close second to those issues, taking up long stretches of the candidates’ televised debates and leading to some of the most heated exchanges between Sen. John F. Kerry, D-Mass., and President George W. Bush.

It’s also an issue on which the two candidates diverge widely.

The president wants to make permanent all of the lower tax rates established with the 2003 Jobs and Growth Tax Relief Reconciliation Act, including the 15 percent tax rate on dividends and most long-term capital gains. Most of those tax breaks were passed with "sunsets," dates when they will expire.

Mr. Kerry wants to return the top two tax brackets to Clinton-era levels, by raising the 35 percent bracket to 39.6 percent, and the 33 percent bracket to 36 percent. This is the proposal behind his pledge to raise taxes "only on Americans who earn more than $200,000 per year." According to a review of 2001 tax returns by Bloomberg News, 2.2 million households would be affected by that proposal.

He also wants to allow the tax rate on dividends to return to as much as 39.6 percent, and to increase the tax rate on most long-term capital gains from 15 percent to 20 percent.

"People vote looking backward and forward," said Chris Edwards, director of tax policy for the Cato Institute "If they think Bush’s tax cuts were reckless, that’ll be a boost for Kerry. If they have made money in the stock market and like paying lower taxes on dividends and capital gains, they’ll support Bush."

Mr. Kerry proposes the creation of $177 billion in new health care tax credits for small businesses, as well as another $142 billion in tax credits for manufacturers that hire new employees. He also supports lowering the corporate tax rate by 5 percent.

The president argues that maintaining the tax breaks passed during 2003 will help small-business owners, many of whom report their business income on their personal income taxes, putting them in the top two upper tax brackets Mr. Kerry is targeting. About 900,000 Americans are small-business owners who would be affected by Mr. Kerry’s proposal, according to President Bush.

Democrats argue that the president’s figures, which are based on the type of tax form used by less than 20 percent of small-business owners, are misleading because many wealthy Americans use the same form to record income they receive from passive investments, such as real estate.

"The administration is seriously exaggerating the benefits of its tax cuts to the vast majority of small businesses," said Joel Friedman, a tax policy analyst at the Center on Budget and Policy Priorities, a Washington, D.C., research institute that studies state and federal budget policies. "The fact is that those benefits will flow disproportionately to business owners with high incomes or large accumulations of wealth."

Both candidates support the continued elimination of the so-called "marriage penalty," which before 2003 required married couples to pay more in taxes than two single people earning the same amount of money.

Either candidate, if elected, may struggle to pay for his proposal, said Timothy J. Rupert, associate professor of taxation at Northeastern University.

"I’ve read through what both of them plan and I’m not sure either one is a real viable plan, given the deficit concerns," he said. "Congress has given taxpayers a lot of tax breaks, which can have a positive impact on the economy, but has given them with sunsets, which tells you we really can’t pay for them."

Mr. Bush’s proposals may increase the $413 billion federal deficit, he said. Mr. Kerry’s proposals may not generate enough money to fund the efforts he supports, he said.

"Mr. Kerry is talking about targeting high-income taxpayers," he said. "But we did that in 1993, and the question then and now is, ‘Will it generate enough revenue?’ "

Earlier this week, a group of 368 economists, including six Nobel laureates, raised similar issues about Mr. Kerry’s proposals, saying his elimination of the tax cuts for the wealthiest families would jeopardize U.S. growth.

In August, the Kerry campaign released a similar letter from 10 Nobel Prize-winning economists calling Mr. Bush’s economic policies "reckless and extreme."

Some Worcester County small-business owners said they think Mr. Kerry’s tax proposals could hurt them.

Robb B. Ahlquist, owner, along with his wife, Madeleine, of the One Eleven Chop House and the Sole Proprietor restaurants in Worcester, said he fears that increasing taxes on small-business owners will prevent reinvestment in those businesses and the hiring of new employees.

"When you have to pay higher taxes, it definitely affects how you run your business," he said. "I’m much more comfortable making my own decisions about my money than having the government make decisions about it. We reinvest heavily in our businesses when we can."

Small-business owners who make more than $200,000 annually are the entrepreneurs who keep the economy growing, said Bruce A. Taylor, president of ERA Key Realty Services of Milford, a real estate company that has Central Massachusetts offices in Spencer, Worcester, Oxford, Whitinsville and Westboro.

"When you give those top earners a tax cut, they don’t eat that money," he said. "They invest it, which multiplies itself throughout the economy. When you give those people more disposable income, they invest it. I personally think the only reason the economy did not go into a deeper recession was because of those tax cuts."

Not all business leaders are behind Mr. Bush’s economic policies, however.

Peter S. Cohan of Marlboro, a former venture capitalist and author of several books about technology business trends, has joined forces with a group called Business Leaders for Kerry. The group, which includes billionaire investor Warren Buffett and Apple Computer founder Steve Jobs, has publicly stated its support for Mr. Kerry’s fiscal policies and are supporting his campaign.

Mr. Cohan has never gotten so directly involved in politics before, he said, but was motivated by his deep concerns about the federal deficit and the drag he believes that is placing on the stock market and the economy.

"The ultimate difference between the two is that the Kerry campaign talks about how to pay for what it proposes," he said. "I actually think Kerry is more concerned about deficit reduction, and Bush is more concerned about cutting taxes and doesn’t care about the deficit. Kerry believes it’s more important to bring the budget back into balance."

The deficit, increases in energy costs and the threat of terrorism have sapped the economy of its energy, Mr. Cohan contends.

"The economy is not doing as well as it should be for an economy coming out of a recession," he said. "A lot of costs are going up, and income is going down."

Some observers say that when it comes to taxes, it makes no difference which candidate is elected. Congress determines which tax packages pass, often making dozens of amendments and changes to the proposals as they move along, they said. Republicans currently hold a majority in both the House and the Senate.

"The truth of the matter is, they can rail away at each other, but Congress makes tax policy," said William E. Philbrick, senior vice president of the accounting firm Greenberg, Rosenblatt, Kull & Bitsoli of Worcester.

Whichever candidate wins also will have to deal somehow with the federal deficit, said Mr. Philbrick, who is a certified public accountant and writes a weekly e-mail newsletter about tax topics. That is likely to hinder any new proposals, he said.

"Bottom line, somebody’s going to have to deal with the deficit," he said. "They’ve got all these ideas, but we’re in a terrible deficit situation."

Business Reporter Jim Bodor can be reached at jbodor@telegram.com.