Breakthrough on Social Security?
Analysis: Division of power may help
By
Kaye A. Thomas
Posted November 22, 2006
Don't hold your breath waiting for major tax reform, though.
 A
government divided between Democrats and Republicans is supposed to be a
recipe for gridlock. Yet there are times when a division of power lays
the groundwork for a major breakthrough that wouldn't otherwise be
possible.
We saw this in 1986, when Democrats in control of Congress
worked with President Reagan to overhaul the tax law. The basic deal was
that we had to give up cherished tax benefits to achieve a simpler,
flatter tax. If Republicans had controlled Congress as well as the White
House, they would have had to accept all the blame for eliminating those
tax benefits. Democrats would have been on the sideline pointing out the
problems instead of working with the White House to solve them. It's
hard to see how this landmark piece of tax reform legislation could have
become law without a division of power.
Social security reform poses similar problems. In
future years, the social security tax will not raise enough revenue to
cover the promised benefits. A solution to this problem will require a
tough compromise. In simplest terms, we have to raise taxes, cut
benefits, or both. Any way you slice it, plenty of people are going to
feel some pain. It isn't feasible for one party to bear the weight of
this reform.
To date, President Bush's insistence on diverting part of the
social security tax to private accounts has been a stumbling block. The
idea didn't exactly catch fire with the general public; polls showed it
becoming less popular during the same period Bush was actively
promoting it. For Democrats it has been a complete non-starter.
The Wall Street Journal reported November 22 on
speculation Bush will move forward on discussions about social security
reform without insisting that private accounts be part of the deal. That
would be a major change in the administration's position. Officially,
the White House still says there is no plan to abandon the private
account idea. The change in control of Congress provides cover for that
change, however, and that could set the stage for an historic, and
sorely needed, reform.
Will the same dynamic produce a major overhaul of the
tax law? Don't count on it. Serious tax reform requires tradeoffs where
people give up tax benefits in exchange for lower rates. But tax rates
are already so low that they can't be reduced enough to make people give
up cherished deductions, credits and exemptions. The top rate of 35% is
close to the lowest it's been since World War II, and we're taxing
capital gains and dividends at a paltry 15%. Bush's desire for tax
reform is a victim of his success as a tax cutter.
Those unpleasant tradeoffs will seem a lot more palatable two
or three years from now. Budget deficits are large and long-range
projections indicate they'll get larger, creating pressure for higher
rates. The annual tab for our finger-in-the-dike approach to alternative
minimum tax is now around $30 billion and gets larger every year: more
pressure for higher rates. What's more, the Bush tax cuts expire in
2010. It's too early to know if these developments will provide the
impetus for the hard choices involved in true tax reform, but in the
meantime it's hard to expect much more than posturing and positioning.
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