Democrats need tax system plan

A friend who works for the Service Employees International Union called the other day to alert me to a Web site her union has launched with the intriguing name “SinceSlicedBread.com.” The union, which recently broke away from the AFL-CIO to pursue its own liberal agenda, has invited the public to submit ideas for innovations in policy that might fuel productive political debate.

As this column was being written, the Web site had logged 9,053 entries. After a Dec. 5 deadline, a panel of judges will pick 21 finalists and then the public will be invited to vote on the one it likes best. Next Feb. 1, the winner of the “best idea since sliced bread” will be given a $100,000 prize.

As I scanned the entries the other day, I was struck by the frequency with which certain topics were mentioned. Schemes to keep jobs in the United States, to improve access to health care and to stimulate energy conservation and save the environment were very popular.

But perhaps the favorite category involved ideas for making the tax system simpler and fairer. As it happened, earlier this week I heard Democratic Sen. Ron Wyden of Oregon argue that his party had better be prepared to enter the debate on exactly that topic – or else cede vital political ground to President Bush.

Wyden has introduced what he calls “the Fair Flat Tax Act of 2005” as the starting point for what he expects to be a major debate next year on tax reform. “I think it is a certainty that Bush will put this issue on the agenda in his State of the Union address,” Wyden told me in an interview, “and the Democrats have to be prepared to offer an alternative that makes sense.”

Wyden sees 2006 as offering a replay of 1986, when President Ronald Reagan signaled his interest in tax reform and Democrats (who then controlled the House but were a minority in the Senate) seized the initiative from him. Bill Bradley, a Democratic senator from New Jersey, teamed with Rep. Dick Gephardt of Missouri to shape the bill that Reagan signed.

Bradley has encouraged Wyden to adapt the same formula that proved successful 20 years ago: Major loophole-closing combined with sharp reductions of income tax rates.

The commission Bush appointed has offered modest steps in that direction in the report to the president it submitted this month, but Wyden says the Democrats can do better.

Like the plan from Bush’s commission, Wyden’s would eliminate the need for the alternative minimum tax, a device that was originally designed to nail tax-avoiders but which is forcing millions of upper-middle- and middle-class families to make separate computations and additional IRS payments.

But unlike the plan submitted to Bush, which continues to provide special benefits through lower tax rates for those with dividend and capital gains and interest income, Wyden urges Democrats to treat those sources of income the same as wages and salaries – and tax them all at the same rates.

He would collapse the current six income tax rates to three brackets of 15, 25 and 35 percent. And he would provide all taxpayers a refundable credit for 10 percent of their state and local income, sales and property taxes – a windfall for the 70 percent of families who do not itemize their deductions.

Wyden’s plan preserves the most popular deductions – for home mortgage interest, charities and children – and keeps the earned income tax credit. Savings for medical expenses, retirement funds and higher education would still be tax-advantaged.

But many other loopholes and specialized tax breaks for both corporations and high-income individuals would disappear, just as they did (for a time) in the 1986 tax bill.

The net effect, according to a Congressional Research Service report to Wyden, is that taxes would be reduced for most families whose wage and salary income was anywhere up to $150,000 a year. And it would provide enough revenue to reduce the federal budget deficit by approximately $100 billion over the next five years.

All of these claims will be tested when the Finance Committee, on which Wyden serves, begins working on tax reform next year. But his basic point is right: The Democrats, who conspicuously lack an agenda for the midterm election year, better be ready to offer more than criticism when it comes time to fix the tax system. Maybe they can come up with something as good as sliced bread.