Democrats calculate risk on taxing the rich

More than two decades after presidential candidate Walter F. Mondale called for tax increases -- and lost the White House in a landslide -- the Democratic Party is on the verge of a major political gamble: Some of its leading members are proposing an array of tax hikes on wealthier Americans.

All of the major Democratic presidential candidates would allow President Bush’s tax cuts for wealthier households to lapse. Most support raising the cap on income subject to Social Security taxes. Some want to raise taxes on capital gains and other investment income.

On Capitol Hill, a leading Democrat -- House Ways and Means Committee Chairman Charles B. Rangel of New York -- has proposed an additional tax on wealthy people and a levy on hedge fund managers to help pay for easing the tax burden on the middle class.

Some party strategists say calling for upper-income tax increases does not pose the political risk it once did because of wide public concern, particularly among Democratic voters, that the gap between rich and poor is growing. Income inequality has become an increasingly salient issue at a time when, amid news of astronomical corporate salaries, many people feel economically insecure about such bread-and-butter items as healthcare, pensions and college costs.

“The top 300,000 income-earners in America now make more than the bottom 150 million combined,” former North Carolina Sen. John Edwards said when he unveiled his plan to raise taxes on the rich and cut them for the middle class. “Our tax code has shifted most of the burden onto the backs of working Americans.”

But Republicans still see the emerging debate on taxes as a political gift. They have called Rangel’s bill “the mother of all tax hikes,” and their House campaign committee sent news releases and videos attacking the proposed legislation to 50 Democrats’ districts.

Bush this week previewed the critique awaiting Democrats on the 2008 campaign trail. “They haven’t seen a bill they could not solve without shoving a tax hike into it,” he said of congressional Democrats, who included a cigarette-tax hike in a bill to expand children’s health insurance. “In other words, they believe in raising taxes, and we don’t.”

Many rank-and-file Democrats in Congress feel vulnerable to such attacks, and cling to the conventional political wisdom that Mondale’s 1984 White House bid was hobbled by his blunt promise to raise taxes.

That in part is why Rangel’s bill has gotten a cool reception among Democrats, even though it links tax hikes on upper-income earners to relief for those who are far less affluent.

“Democrats have been so burned by the anti-tax mantra, they are not going to volunteer to raise taxes,” said Rep. David R. Obey (D-Wis.), author of an ill-fated proposal to levy a new tax to pay for the Iraq war.

Conservative analysts dispute the idea that the tax code is unfair, saying that top earners pay a disproportionate share of the nation’s total income-tax bill.

But Democrats see a different picture in a new analysis of Internal Revenue Service data that shows the richest 1% of Americans earned 21.2% of all income in 2005 -- up from 19% in 2004 and a postwar record. Democrats see that as an invitation to shift more of the burden to the wealthy.

The next president will have to address the tax issue, because Bush’s tax cuts are due to expire at the end of 2010.

Sens. Hillary Rodham Clinton (D-N.Y.) and Barack Obama (D-Ill.) have said they would let the cuts for households earning more than $250,000 lapse. Edwards would repeal the tax cuts as soon as possible for those earning more than $200,000. All three have opposed the permanent repeal of the estate tax and have called for higher taxes on managers of certain investment funds, such as hedge funds, the lightly regulated pools of money that often use aggressive investment strategies.

The looming insolvency of Social Security and the widening reach of the alternative minimum tax are two issues driving the call for new revenue.

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Rangel’s approach

Rangel’s bill centers on abolishing the alternative minimum tax, which was enacted in 1969 to keep rich people from using deductions to wipe out their income tax bills. Because the tax is not indexed to inflation, it increasingly hits the middle class. Lawmakers of both parties see this as an urgent problem, but it would cost more than $1 trillion over 10 years to get rid of the tax entirely.

Couples earning less than $200,000 a year would not be subject to the alternative minimum tax under Rangel’s bill. The lost revenue would be replaced by instituting a surtax of up to 4.6% on the income, capital gains and dividends of higher earners. The bill also would provide additional relief for middle-income taxpayers.

On Thursday, the House’s tax-writing panel passed a one-year reprieve for many families that would otherwise be hit by the alternative minimum tax, but a broader fight over taxation awaits.

The Republican presidential candidates have seized on Rangel’s proposal as a window into Democrats’ future tax policies.

“House Democrats have shown once again why they cannot be trusted with stewardship of our economy,” former Massachusetts Gov. Mitt Romney said.

In this week’s debate among Democratic presidential candidates, Clinton praised Rangel’s “goal” of eliminating the alternative minimum tax, but said she did not embrace its details. Obama said he did not know all the details of Rangel’s bill and may not agree with some aspects of it.

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Social Security caps

The Clinton-Obama rivalry has played out over the issue of lifting the ceiling on income subject to the Social Security tax. Obama says his support of the proposal shows his willingness to take on politically sensitive problems that other candidates shun -- and he has stepped up criticism of Clinton for not being more specific about how she would shore up Social Security.

“If we have failed to have a real honest conversation about Social Security, it will not get fixed,” he said in an advertisement.

Social Security is on a path to insolvency as the baby boom generation has begun to retire and draw benefits. The program’s trust fund is expected to begin paying out more in benefits than it takes in from revenues in 2017, and to run dry around 2041.

Clinton has said that the best way to address the problem is to convene a bipartisan commission, like the one that preceded the last overhaul of the program in 1983. In the meantime, she has refused to endorse specifics that might open her to GOP attacks. And she has insisted that the problem is not as urgent as many people believe -- and as Republicans say in urging a major overhaul of the program.

“I think for us to act like Social Security is in crisis is a Republican trap,” Clinton said at this week’s debate among Democratic candidates.

Currently, annual income up to $97,500 is subject to Social Security’s 12.4% tax, which is split between employers and employees. Obama has not said how high he would place the cap.

The idea is less politically painful than alternative proposals to cut benefits, raise the retirement age or increase the Social Security tax rate. At one point in early 2005, even Bush said he might be willing to consider raising the income cap, to the consternation of many Republicans.

No candidate but Obama has put much emphasis on this issue. But when asked at a recent debate, the other Democratic hopefuls, Clinton aside, indicated support for raising the income cap.

“I don’t understand why somebody who makes $50 million a year pays Social Security tax on the first $97,000 . . . and not all the rest, while somebody who makes $85,000 a year pays Social Security tax on every dime of their income,” Edwards said.

Michael Steel, spokesman for Republicans on the House Ways and Means Committee, said Democrats’ willingness to seek tax hikes in an election year was a measure of how brimming with political confidence they are heading into 2008.

“They are possibly overconfident,” Steel said. “Apparently, after only one or two major tax increases in the past 25 years, they don’t remember what a salient issue this is.”

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janet.hook@latimes.com