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Schumer’s Tax-Cut Shortsightedness
The senator's fiscal-policy position should be avoided by reelection-minded Democrats.


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Phil Kerpen

Sen. Chuck Schumer, the chairman of the Democratic Senate Campaign Committee, recently proclaimed that “the tax issue has lost its steam.” It hasn’t. In fact, it’s one of the strongest issues the Republicans have — and candidates who focus on it will continue to win.

 

For the sake of the American economy, and their own political fortunes, Democrats should disregard Schumer’s fiscal shortsightedness.

 

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The problem for pro-tax Democrats like Schumer is not so much that Americans are clamoring for tax cuts — though many are — but that huge majorities of Americans are opposed to tax increases, which under present law are slated to come into effect regularly over the next several years. Because of procedural rules, all of the tax cuts enacted since Bush took office have been enacted on a temporary basis, which means that, absent congressional action, large, automatic tax hikes are coming.

 

The recent fight over tax reconciliation centered on precisely the question of whether tax hikes, in this case on capital gains and dividend income, should be allowed to occur or should be postponed. With narrow Senate approval, those tax hikes were delayed for two years, but they’re still coming. Also coming are income-tax rate hikes, the marriage-penalty tax, reduced child credits, and the full-force federal death tax.

 

According to the most recent data compiled by the Organization for Economic Cooperation and Development, the average wage earner in the U.S. in 2005 earned about $27,000 and paid a total effective tax rate, including federal, state, and local taxes, of 30 percent.  Americans are not under-taxed. Yet Democrats like Schumer would do nothing to stop the largest tax hike in American history, which is scheduled to occur over the next five years. They would prefer to hike taxes even sooner.

 

That’s good news for some Republican candidates, but it’s bad news for American taxpayers. The Free Enterprise Fund recently commissioned a poll conducted by McLaughlin & Associates that found that 71 percent of voters support congressional action to cancel coming tax hikes. This is not a highly partisan issue; the same poll found 65 percent of Democrats support congressional action to prevent tax increases.

 

Numbers like these make it clear that Americans are still steaming over taxes, especially when it comes to the Democrat-backed push for sharp, across-the-board tax hikes.

 

It’s the American people, not the pro-tax Democrats, who have the facts on their side.  The economic recovery we’re now enjoying is a dramatic supply-side success story.  After 9 quarters of declining business investment, the 2003 tax-rate cuts triggered a dramatic reversal: 12 consecutive quarters of rising business investment. For the past three years the economy has grown at a brisk 3.9 percent rate, almost a full percentage point faster than the postwar average.

 

The economy has created more than 5 million jobs, delivering the largest labor force in American history. Unemployment has fallen from 6.2 percent to 4.7 percent, significantly lower than the forecast prior to the rate cuts.

 

Wages, meanwhile, are rising: In the past year, average wages increased by 3.8 percent, according to the Bureau of Labor Statistics.

 

As for the markets, the Dow stood at 8,600 when the Senate passed the investor rates cuts three years ago.  Even with its recent correction, it now stands over 11,000, a stunning 30 percent jump. The markets have created more than $5 trillion of shareholder wealth. Dividend increases are up 72 percent and dividend cash is up 40 percent.

 

Not surprisingly, all this growth has had the net effect of throwing off more tax revenues. Corporate income tax revenues grew by 40 percent in two consecutive years. Overall federal revenue was up 5.5 percent in 2004 and a stunning 14.5 percent last year. Capital-gains tax revenues are higher than they were projected to be before the rate cuts. And the 2005 deficit was only 2.6 percent of GDP, lower than it was every single year from 1980 to 1994 — hardly cause for alarm.

 

Low taxes are a crucial part of the policy mix that underlies our prosperity. Strong majorities of voters, of both parties, understand this fact. Democrats in Congress should disregard Schumer’s advice and work with Republicans to prevent tax hikes. If they don’t, they could pay a steep price come November.

 

– Phil Kerpen is policy director for the Free Enterprise Fund. A version of this column originally appeared in the New York Sun.


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