TCS Daily

The First Domino...

By Stephen W. Stanton - January 23, 2003 12:00 AM

Politicians mess things up all the time, especially the tax code. But they usually do it in secret. They make their deals behind closed doors, giving away some pork in exchange for the tax break du jour. They take baby steps to avoid undue attention. A little loophole here, a sunset provision there, and a few thousand pages later, our tax system becomes incomprehensible. The tax code now stands at over 45,000 pages, not including the forms. Until recently, it seemed like this beast would never stop growing.

But something changed. President Bush announced his tax proposal without the usual closed-door meetings. He did not compromise his principles for political expediency, and he did not appease his opponents with pork. Instead, he called for a seismic shift in tax policy, ending the double taxation of dividends, and cutting the top tax rates. He has unapologetically taken on the class warriors and prepared for the rhetorical battle to come.

Democrats were shocked by the audacity of the Bush Plan. They expected a watered-down version of dividend tax relief. Early reports suggested only a partial exclusion of dividend income, or perhaps capital gains treatment. Never would they have imagined that in a period of such high unemployment, the president would cut taxes for the "super-rich". When Bush announced a proposal to do exactly that, it seemed too good to be true. Bush had given the liberals a better gift than they could have possibly hoped for: As key Democrats elbowed each other for the presidential spotlight, and the rest of the caucus remained divided on military action, homeland security, and universal healthcare, Bush gave them a unifying issue they could all stand against. For the first time in a long time, Democrats all agree with each other about something.

Congressional Democrats believe that on this issue, they have public opinion on their side and the moral imperative to stand their ground. They see Bush as nothing more than Don Quixote charging a windmill in a hopeless crusade. They think Bush will waste endless hours and political capital trying to breach their populist fortification. They expect that the president will make no progress in two years, and the public will tire of his sophomoric quest. When that happens, Democrats hope to regain control of Congress and perhaps even the White House. In the meantime, they just have to defend their position from their secure perch atop their sturdy windmill.

Or so they think. It seems they misunderestimated this president again. It wasn't a gift Bush gave the Democrats. It was bait. And it isn't a windmill they're standing on. It's a giant domino, and it is ready to topple.

I can see Karl Rove smiling like a kid on Christmas morning. Before modern toys, little kids played with dominoes. Rove has long since outgrown dominoes, so now he plays with issues. The basic idea is the same. You set 'em up and knock 'em down. Dividend tax relief is just the first one to go.

Some Democrats argue there are more egregious instances of double taxation than any problem we have with dividends. For example, in addition to income taxes, most workers pay Social Security taxes on every dollar they make. As long as Social Security taxes exist, then dividend tax relief may cause some schoolteachers to pay a higher combined tax rate than the rich folks. That is regressive, and it is bad public policy. So why should we allow double taxation of wages, but not dividends?

But here is the catch: I am sure Mr. Bush and Mr. Rove agree that Social Security taxes are too regressive. So they want to eliminate the tax altogether. In its place, they would let workers put their money into private accounts, turning our most regressive federal program into an ultra-progressive tax-preferred savings plan. With a little judo strategy, liberal outcry over dividend tax relief can make privatized Social Security a reality. There goes domino number two. Advantage: Bush.

But liberals complain about more than dividend tax relief. For example, they also point out that the marginal rate cuts disproportionately favor the super-rich. The logic, of course, is that benefits given to a select few should not be borne by the masses. The argument is sound, but it, too, we have heard before. In fact, we heard Republicans make it. But not on tax policy... The argument is better suited to tort reform, especially in medical malpractice.

Tort reform? Believe it or not, yes. Anyone that gets a multi-million dollar malpractice settlement instantly joins the ranks of the super-rich, squarely in the crosshairs of congressional Democrats. Besides, most people injured or killed by medical professionals don't get more than a few thousand dollars above their actual expenses. However, a small but expensive minority of disgruntled patients win outrageous awards, including "punitive" damages that can reach into the millions.

But the doctors aren't really punished by the "punitive" damages. More often than not, the awards are covered by malpractice insurance. Every insured doctor shares the rising cost of the lawsuits. Coverage has gotten so expensive that it has driven thousands of doctors from the medical profession. The remaining doctors must pass on the onerous cost of malpractice insurance on to their patients, even those covered by Medicare and health insurance. The average Joes bear the cost of ridiculous awards that serve only to enrich a few ambitious trial lawyers and a handful of patients playing lawsuit bingo. To add insult to injury, lawsuits drive down the number of qualified doctors available to serve the American public.

But there is a solution. By limiting punitive damages and "pain and suffering" awards to a quarter million dollars, the price of malpractice insurance will come down tremendously. This liability cap will be in addition to actual damages, such as lost wages and additional medical bills.

To gain support for this simple, elegant, and pragmatic proposal, Bush and Rove can turn the Democrats' rhetoric against them. Why should an average worker's health insurance go up just because some jury decides to create new millionaires? The Bush team is keeping track of who is waging class warfare against the Bush tax plan. You can bet their words will show up in Bush's tort reform speeches over the next two years. The third domino will fall squarely on the trial lawyers.

Optimistically, Medicare may follow Social Security's path to privatization. Medicare tax is another double tax on wages, but unlike Social Security, the program is in immediate peril. The current system is inexcusably inefficient, and throwing money at the problem will not make it better. Medical Savings Accounts provide a way out of this mess. Participants set aside money in tax-free private accounts for medical purposes only. Citizens without enough money receive a government subsidy into their MSA's, yet retain control of their healthcare decisions. How could the class warriors complain when Dubya proposes repealing another regressive tax, giving money to the poor, and improving medical care for every American? This last domino will be tough to tip, but it certainly isn't a windmill.

There are plenty more dominoes lined up, though Democrats remain in denial. They are too busy to keep the first one from falling over. Their class warfare rhetoric is only working against them.

Now is the time to argue for fundamental reform of public policy. Rarely in recent history have the arguments against change been so asinine, and never have the reformers so dominated Washington. Common sense will overwhelm the voices on the left, and Bush will make far-reaching changes to many government programs. The Democrats will never understand that their sturdy windmills were really just precarious dominoes. Thinking Bush sophomoric, they will never accept that they were set up by a political mastermind. They will just wonder when Don Quixote got himself a bulldozer.

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