Feinstein, Campbell Disagree on Income Tax

He would overhaul the nation’s tax structure. She would make it provide more services. He insists there is no big budget surplus. She believes the money is there and should be used to shore up America’s future.

Pundits note that Democratic U.S. Sen. Dianne Feinstein and her Republican opponent, Rep. Tom Campbell of San Jose, share many views. But when it comes to taxes and spending, they could not be further apart.

If Campbell had his way, the nation’s tax structure would be turned on its ear. There would be no federal income tax. Instead, we’d have a national sales tax. The capital gains tax would be cut in half. But with online shopping a growing economic force, Campbell would not oppose taxing sales on the Internet.

Feinstein sees no reason for an Internet tax or for dismantling the nation’s tax structure. In fact, she warns that adopting Campbell’s national sales tax proposal would leave Congress unable to fund basic services.

As for the federal budget, Campbell says he does not believe even fellow Republicans who talk of a huge surplus. There is no big surplus, he says, unless you include Social Security funds, which should be squirreled away for future retirees.

Feinstein echoes the widespread insistence that federal money--lots of it--is available. But she says it should not be doled out to taxpayers. To the contrary, she says, it should be used to extend the solvency of Social Security and devoted to areas of need--public education, health care, the environment--that have long been underfunded.

Feinstein’s voting record reflects the view that government must provide an array of crucial services. Campbell’s votes underscore his contention that government must cut its costs for everything from agricultural subsidies to the Corp. for Public Broadcasting. In its most recent ratings, the National Taxpayers Union said no one in the House voted for fewer appropriations than Campbell, while Feinstein was the Senate’s second-biggest spender.

The tax proposal that has generated the most disagreement between them is Campbell’s call for replacing the federal income tax, over five years, with a 20% national sales tax, with exemptions for food, medical care and housing up to the median value in an area.

The approach, like one offered by House Ways and Means Committee Chairman Bill Archer (R-Texas), has two crucial advantages over the current income tax, Campbell says.

First, it encourages savings rather than penalizing wage earners. Just as important, he adds, eliminating the personal income tax would go a long way toward keeping the government’s nose out of everyone’s business.

“If the federal government does not collect data from the federal income tax, it tremendously enhances freedom,” Campbell said in an interview. “Government doesn’t have to know about you. Whether you are paying alimony. Receiving alimony. How many children you have. Where your home is. Do you have a second home? Where your business or property is. All of that becomes irrelevant if they are not collecting personal income taxes.”

The five-year timeline, Campbell said, also would allow lawmakers to make sure the plan works.

“The importance of the gradual phaseout is that if I’m wrong . . . we can turn it around,” he said. “But if it does work, and we are gradually phasing it in, it would have no more effect than an inflation rate of 3.5% a year.”

Some economists embrace the national sales tax idea, noting that it is working well in countries such as France and Britain.

“If we were able to lower taxes on capital income and replace them with a [national sales tax], the U.S. economy would benefit substantially from that change,” said UCLA economics professor Lee Ohanian. “And it would benefit not only the wealthy but others.”

Feinstein sharply disagrees, as do others.

Challenging the congressman’s math, she said that for his plan to offset the loss of federal income tax, the national sales tax would have to be at least 37%, almost double Campbell’s projection. Otherwise, she said, it would “blow a $500-billion hole” in the budget.

For Californians, who already have an 8% state sales tax, that would mean a staggering 45% rate “on nearly everything they purchase,” Feinstein said. A $20,000 Ford Taurus would cost $29,000.

“A national sales tax,” she said, “would have the effect of raising taxes on nearly all American taxpayers or . . . undo the significant progress we’ve made in eliminating the federal deficit and lowering interest rates.”

Feinstein said she favors a targeted tax cut such as the one she co-sponsored with Sen. Charles E. Grassley (R-Iowa) that would reduce taxes by $272 billion over a decade.

Democrat Robert Reich, former U.S. Labor secretary under President Clinton and now a professor of social and economic policy at Brandeis University, also warned that a large national sales tax would wreak havoc with the economy.

“The sole advantage of a sales tax is that it might induce people to save a bit more,” Reich said. “But the disadvantages far outweigh this one potential advantage.

“Even with the exemptions, a sales tax still weighs far more heavily on the poor than the rich,” Reich said, because the items “left over” are ones people still must buy.

“Radios, toasters, ironing boards, dishwashers--all of these are the kinds of things that the lower income and middle class are apt to buy,” he said. “Why should they have to pay more at a time when they are already getting very little out of this recovery?”

Although it is true that many countries have such a tax, Reich said that they also have both government-funded health care and far less disparity in incomes than in the United States.

Views Differ on Internet Tax

In another area of disagreement, Campbell opposes taxing access to the Internet but not online sales. California now taxes sales involving companies and customers that are both within the state, and Campbell sees no reason to block local governments from imposing such levies--especially when traditional retailers still face sales taxes.

But Feinstein wants to continue a moratorium on such taxes until their effects have been determined by a national panel.

“The Internet is fueling an unprecedented economic boom in this country and particularly in California,” Feinstein said. She called it “critical that we extend the moratorium on any new or discriminatory taxes on the Internet until we can be sure that they will not have an adverse impact on our economic growth.”

With the nation’s economy still booming, the size and use of the federal surplus illustrate another clear difference between the two candidates.

In speech after speech recently, the senator, like many Democrats, has insisted that government must do all it can to ensure that the nation’s recent prosperity is shared by more Americans--now and in the future.

“Over the past two decades, incomes of the poorest fifth of the economic ladder have actually dropped by 19%,” Feinstein told a recent meeting of the Los Angeles Area Chamber of Commerce. “So if you are in the lowest fifth, in order to afford . . . rent, food, clothing [and] child care, generally you have to work two to three jobs just to stay out of poverty and keep food on the table.”

Parts of California--including some of Los Angeles--resemble “underdeveloped countries,” Feinstein said, and such problems should be tackled when the nation can afford it: “There is no better time to face it than now.”

Citing congressional projections of a record surplus, Feinstein said she strongly opposes using that money for large tax cuts.

“The Republican budget calls for increases in spending on defense, education, veterans’ health care and income support payments for farmers,” she said during last month’s floor debate on the fiscal 2001 budget. “I applaud these increases. We need a strong defense. To take care of veterans. To educate our children. To protect our farmers from income fluctuations that are the results of weather, disease and market conditions.

“Unfortunately, to increase funding for these priorities while providing almost $1 trillion in tax breaks would result in a 10% across-the-board cut in all other non-defense discretionary spending.”

And that, she said, would mean staggering cuts. Among them: 750,000 low-income women, infants and children removed from government assistance, 40,000 children cut from Head Start, the loss of 1,100 FBI and 900 Drug Enforcement Administration agents and abandonment of federal plans to hire 100,000 new teachers.

Reich agrees.

“A strong case can be made for devoting whatever surplus we have to better schools and better child care and health care,” he said. “The condition of our schools is scandalous . . . and health care is a major problem. There are more people uninsured today than in 1993,” when boom times began.

Campbell says he cannot support any talk of doling out a surplus until he is sure there is one.

“There is no budget surplus. There is a Social Security surplus,” he says, in what has become a fixture of his campaign speeches.

Although Campbell says the Social Security surplus should be safeguarded, he did vote for the GOP’s $790-billion tax cut. But he said he supported that measure, later vetoed by Clinton, only after it was amended to ensure that tax cuts would not take effect unless the federal government’s annual interest payments on debt declined from year to year.

If lawmakers do anything with the Social Security surplus, they should not earmark it for government programs. Instead, he says, they should invest it in bonds--for airports, roads, etc.

“The money ought to be invested in income-producing assets or else . . . when the Social Security crisis happens, we will have nothing to go to except taxing that generation of workers,” Campbell said. “Taking money from Social Security is one thing. Investing money in a prudent manner . . . is quite another.”

Others share his concerns.

Arguments Over Surplus

“The budget is in surplus now, and one of the reasons is that Social Security revenues are much higher than Social Security payments,” said UCLA’s Ohanian. “What is slipped under the rug is that around 2030, if there are no changes to the Social Security system--either in benefit rules or revenue rules--the government will be facing a very major deficit.”

The number of retirees compared with workers will increase dramatically, Ohanian says, and that will strain revenues.

“To say we have $300 billion [in a surplus] now to build new parks or open new highways, those are worthwhile. But they are not as pressing as trying to resolve the crisis we face in Social Security,” Ohanian said.

Russell Roberts, an economist at the Center for the Study of American Business at Washington University in St. Louis, agreed with Campbell. “There is not money just sitting around that we have not allocated,” he said.

But the argument over what to do with any surplus, Roberts said, is as misguided as the 1980s debate over the national deficit.

“The deficit was not a threat to our livelihood. It was not a threat to our economic well-being,” he said. “The economy solved it by growing, and none of the Draconian measures ever were adopted, thank God.”

But “the real question is what should government be doing,” he said, “because surpluses and deficits are a question of how to fund what government does, which is secondary to the question about what government actually does.”

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Times librarian John Jackson contributed to this story.

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Dueling Views

Democratic U.S. Sen. Dianne Feinstein and her Republican challenger, Rep. Tom Campbell, are far apart on taxation and government spending. Some of the differences: