Fiscal Boldness First

If he takes the oath of office as president, John Kerry would inherit an upside-down economy marked by slow job growth, stagnant wages, and rising costs; twin deficits--budget and trade--that threaten havoc for the middle class; a health-care system that's facing financial chaos; a dangerous and costly occupation in Iraq; a vitally important but vastly undercapitalized homeland-security effort; and international alliances that have been mangled almost beyond recognition. Of course, the list goes on.

He may feel he's just become the mayor of hell.

On an operational level, President Kerry will be confronted by a federal government dispirited in its mission and adrift in an ocean of red ink. Thanks in large part to George W. Bush's tax cuts, he'll find that the United States is now on a steady course to a fiscal gap exceeding 5 percent of our gross domestic product as far as the eye can see. The impact on Social Security and Medicare, meanwhile, will be devastating.

Some of my colleagues from the Clinton administration are convinced that this will require President Kerry to become our country's comptroller in chief. No doubt someone is already thinking about a White House summit on deficit reduction. I offer a bolder alternative: President Kerry should direct his treasury secretary and chief economic adviser to use the mess President Bush created to pursue a bold and progressive tax reform that rewards work and expands the middle class.

Many Americans understand that the taxpayers benefiting the most from the Bush tax cuts are those needing it the least. What fewer realize are its broader implications. By concentrating income-tax cuts on the very wealthiest, creating new tax breaks for investment-tax shelters, and ignoring the crushing burden of the payroll tax on lower- and middle-income families, Bush has made the federal tax system even more complicated, unfair, and regressive than it already was.

Over the past 50 years, there has been a significant shift in the composition of federal tax receipts toward taxes supported by labor and away from taxes paid by the owners of capital. While the contribution of payroll taxes to federal tax receipts increased from 1.6 percent of gdp in 1950 to a whopping
6.8 percent of gdp in 2002, more than a third of total federal tax receipts, corporate income taxes fell from 4.8 percent of gdp during the 1950s to 1.3 percent of gdp in 2003.

By reducing taxes on income earned through investments and increasing the share of the burden shouldered by middle-class wage earners, today's system perversely punishes those willing to work hard and businesses willing to create jobs in the United States, all while rewarding the movement of capital and jobs overseas. Even Kerry's vow to repeal tax cuts for those making more than $200,000 a year won't begin to repair the damage caused by the Bush tax cuts. He needs to go further.

President Kerry's challenge will be to craft a new tax policy that creates economic growth, strengthens the middle class, and generates the revenue needed to fund our national priorities and close the fiscal gap.

Though Washington's chattering class can't say enough about the divisions in our country, one topic where a consensus has been reached is taxes: Americans of all political persuasions want a system that is much fairer and simpler.

What would progressive tax reform look like? At the Center for American Progress, we're crafting a plan that would overhaul and simplify the entire system, reduce the number of tax brackets to three, and tax all income at the same rate, whether it be wages, salaries, capital gains, or dividends.

Our plan would also close individual and corporate tax loopholes, increase the standard deduction for low-income taxpayers, and make the payroll tax more progressive. It's an approach that would reward work, provide a measure of relief to low- and middle-income families, and generate the funds the federal government needs to meet its commitments.

Today, tax reform may not be a blip on anyone's radar screen, but the longer we delay, the larger the fiscal gap grows. If John Kerry puts the full weight of the presidency behind it, he could not only rescue the federal government from a bottomless pit of deficits; he could also help strengthen and expand the middle class. In the process he'd be succeeding at something else, too: reminding America what progressive leadership can accomplish. n

John Podesta was President Clinton's chief of staff from 1998 to 2001 and is currently the Center for American Progress' president and CEO.