Edwards Flunks Post-Reagan Tax Test(Correct)

(Corrects extended tax filing deadline in first paragraph.)

April 19 (Bloomberg) — The Internal Revenue Service gave taxpayers inconvenienced by the weekend's nor'easter until April 26 to file their returns. So we all have more time to think about the tax policies of the various presidential candidates.

That may be a good thing, because the old Reagan-Roosevelt model of fiscal policy could use an update. Back in the 1980s, or even the 1990s, it was possible to argue that the U.S. need not worry about spending: the country could outgrow the cost of its outlays. That was Ronald Reagan's sunny message, and Franklin Roosevelt's before him.

Not today. Entitlements are expanding so fast that they are a problem. That is true not so much because they cause budget deficits, but rather because those deficits force the sort of tax increases that get in the way of private-sector growth.

So how do the candidates stack up against the old growth and the new entitlement challenge?

A mark of "F" goes to John Edwards, who offered his plan this week in a pod cast. Edwards suggested that the 50 million families with relatively simple returns be permitted to pass the responsibility of managing those returns to the IRS.

Then the taxpayers would never even have to talk to the IRS, fill out a form, or meet an accountant.

This seems clever. The Democrat Edwards is trying to supplant Republicans in their traditional role of pandering to taxpayer hatred of tax authorities. The plan also has another kind of appeal. Edwards is playing Steve Jobs and trying to make Hillary Clinton look like a cog from IBM.

New Meaning

But the Edwards plan is pernicious because it makes the whole tax process seem all-the-more inevitable. If taxpayers never confront what they owe on a W-2 form, they will never think about what they could have done with that money in terms of investment or invention. The system gives new meaning to the word "passive." Under the Edwards plan, Americans would be so accustomed to the government hand in their pocket they would never even consider the budgetary consequences of, say, Medicare.

Clinton's tax plan gets a "D," for it obsesses about one goal — negating President Bush — and forgets in the process about curtailing entitlement growth or supporting the private sector generally. Rolling back the Bush tax cuts may yield less cash than Clinton imagines for Treasury (higher taxes can slow the economy), and send a signal to lawmakers: spend away.

"Incomplete" is the grade for Barack Obama, though we can nurse some hope for him. Obama is less of an interest-group politician than Clinton. But like Edwards and Clinton he has shown no evidence he has the backbone to fight for entitlement cutbacks or private-sector growth.

Another 'Incomplete'

Rudy Giuliani likewise gets an "incomplete." On the growth front, the news that he signed on Michael Boskin of Stanford's Hoover Institution is good. Boskin, chairman of the Council of Economic Advisers for George H. W. Bush, argued in the mid-1990s that traditional government meters were overestimating inflation and underestimating true growth. At the time this seemed radical, but the strong earnings and low unemployment of the past decade have since proven Boskin right.

Two questions about Rudy remain. The first is that he is by temperament a law-and-order man, not an econ fellow, which doesn't bode well when it comes to understanding what makes the animal spirits rise. The second is that while he talks about fiscal discipline and supply side economics, he hasn't said much about the post-Reagan entitlements challenge.

Romney, McCain

The more interesting candidates are Mitt Romney and John McCain.

Romney knows about creating value — he created Bain Capital, a buyout firm — and his policies get the best marks when it comes to growth. Romney wants to lower taxes more and cut taxes that affect investments, such as capital gains, for the middle class. This sounds like Edwards's idea but it's actually the opposite. It brings home to workers the value of the private sector by removing the government entirely from their stock transactions. Romney says he wants to cap non-defense discretionary spending, and he says that he would use the veto when Congress exceeds budget targets. But he has just started to get specific on entitlement reform.

Some on the right dislike McCain. The libertarian magazine of the Reason Foundation recently published an article by Matt Welch headlined: "Be afraid of President McCain: The frightening mind of an authoritarian maverick." And it is true that McCain didn't vote for President Bush's tax cuts.

But in a speech this week in Memphis, Tennessee, McCain was more direct than the other candidates about the entitlements dilemma. If Congress doesn't want to cut entitlements, McCain said, "they can just let me do it." At least McCain, unlike Giuliani and Romney, has actually worked in the Senate, so he knows how hard this would be.

Numbers That Matter

At this point, many Americans tend not to concentrate on tax policy, or any other policy. They listen for a general message — a slogan. Pundits will say the numbers that matter right now are the tally of electoral votes in the Southern states compared with those of Obama's Illinois and Clinton's New York. Or the amount of cash raised.

Just as important is the number 35 — the current top percentage tax rate, which in an ideal world would stay in place. Or $94,200, the amount of annual income at which Americans now cease making additional Social Security payments. If tax season keeps the spotlight on those numbers, the longer it lasts, the better.

(Amity Shlaes, a visiting senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2007 Bloomberg

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