A Brief Taxonomy, in Case Bush Reads Other Lips

If the financial markets continue signaling George Bush that they do not like what they read on his lips, some form of tax increase seems certain. The budget deficit, more than $150 billion this year, must be brought down to $100 billion next year just to satisfy the Gramm-Rudman law, and perhaps even more to reassure America’s creditors.

A tax increase will be a big part of the eventual budget package because the White House won’t slash military spending, the Democrats are dug in defending social spending (which has been steeply cut for eight years) and both parties are vying to defend Social Security.

But what to tax? Herewith a taxonomy of possible taxes:

--Cigarettes and alcohol. Doubling the current federal cigarette excise tax of 16 cents a pack would raise $3 billion a year, and perhaps discourage some smoking, too. Hiking taxes similarly on alcohol would raise another $4 billion yearly.

Former Presidents Gerald Ford and Jimmy Carter urged President-elect Bush to rely on this relatively painless form of “sin tax.” The main argument against it is that taxing alcohol and tobacco is regressive: The poor hit the bottle and depend on nicotine more than the rich.

--Gasoline. This is a good time to raise gas taxes, because there is a glut of oil on world markets and the retail gas price has dropped. If we raise taxes now, the next time oil is scarce OPEC will have a harder time gouging consumers because the retail price will already have risen via higher taxes at the pump. That way, we use the higher price to encourage conservation, and the additional charge goes to the U.S. Treasury rather than to OPEC and the oil companies.

Each penny of tax increase at the pump raises about $1 billion. The main argument against this tax is the same one against sin taxes. Gas taxes, like most consumption taxes, are regressive. And gasoline, unlike booze, is a genuine necessity for most families. Higher gas taxes are a special burden on rural families and on long-distance commuters.

--Corporate takeovers. The hostile takeovers in today’s headlines are financed with borrowed money. Most of these deals make financial sense only because the interest on that borrowed money is a tax deduction. In other words, Uncle Sam (which is to say other taxpayers) subsidize them. Removing the tax deduction for debt-financed hostile takeovers would raise billions of dollars. Better yet, it would discourage such takeovers.

--Income taxes. Thanks to the Reagan tax program, the wealthiest Americans enjoyed windfall tax cuts during the 1980s. For most people, the cuts in income-tax rates were just about wiped out by higher payroll taxes and fewer deductions. But according to the Congressional Budget Office, the richest 1% of Americans now enjoy tax rates fully one-third lower than what they paid in the late 1970s.

The simplest solution would be to restore the top rate on the income tax for people earning more than $100,000 a year. That top rate is scheduled to drop to 28%. Holding it at 33% would raise $5.5 billion in 1989, and $6.5 billion in 1990. A maximum rate of 38% would raise that much more, and wealthy people would still pay a far lower tax rate than they paid a decade ago.

--Social Security. Some people think middle-income retired people are getting off too lightly. They don’t pay payroll taxes; they get extra exemptions; and half their Social Security income is untaxed. Seemingly, it makes sense to tax the other half of Social Security for well-off retired people who really don’t depend heavily on Social Security checks.

But Social Security is a solemn covenant and age is the wrong criterion for tax treatment. We would accomplish exactly the same objective by increasing income-tax rates slightly on all well-to-do people, regardless of their age.

--Estate taxes. When a stockholder dies, current tax law eliminates any capital-gains tax that would otherwise be owed by his heirs. Large inheritances are pure windfalls. They should at least pay the same capital-gains tax as other transactions. Closing this loophole would raise about $5 billion.

--Value-added taxes. The value-added tax, a kind of national super-sales tax, would raise tens of billions of dollars. We will need it when the nation finally wakes up and recognizes the need for treating child care, medical care, lifetime learning and other deferred needs as national problems. For now, a tax should be held in reserve. It is too useful to squander on deficit reduction.

In sum, nobody likes taxes. But sometimes they are necessary. The same moneyed interests who argue that financial stability requires budget discipline invariably want somebody else to pay for it.

But, as always, the fairest tax is a tax based on ability to pay. And during the 1980s, the people with the most ability to pay enjoyed the most generous tax cuts. Though some selective taxes, such as a higher gasoline tax, might be part of the total package, most of the tax increase should be borne by America’s wealthiest people, through more progressive income and inheritance taxes.