Reagan Redux Could Pay for Health Care

“A fiscal Frankenstein”; so said Rep. Paul Ryan (R-Wisconsin) about the health care bill just passed by the Congress. Soulmate Republicans echoed his warning, predicting budgetary doom.

But GOP legislators who cry fiscal wolf are twice trapped. For eight years, they aided and abetted as President Bush turned a budget surplus into a $1.2 trillion deficit. Even more, an inconvenient truth has inconveniently surfaced: a tax policy passed by right-wing icon Ronald Reagan could pay for Barack Obama’s health care reform.

The policy is equal taxes on income from wealth and income from work, and it was a key part of Reagan’s Tax Reform Act of 1986. The Act set the rate on long-term capital gains the same as that on wages and salaries.

Returning to an equal-tax policy could nearly pay for the health care bill. This simple fact was buried in the 2008 capital gains data released early this month by the Internal Revenue Service. Here are the numbers from a Bloomberg report:

“The [IRS] data show that 11.2 million tax returns out of 142.4 million filed last year reported $447 billion from capital gains. Most of that income, $363.3 billion, was earned by 964,160 households reporting overall income of $250,000 or more.” That $447 billion in gains, the article noted, was down 40 percent from the $749 billion racked up in 2007.

Now for some tax arithmetic. At the current 15 percent levy on long-term gains, the Treasury would have realized $67 billion on the gains for 2008. By comparison, if taxes had been paid at the top ordinary income rates of 33 percent and 35 percent, the Treasury’s take would have risen to more than $150 billion. The difference between the two figures is $83 billion – not far from the new Congressional Budget Office estimate of $94 billion a year for the health care bill. Using the IRS’s gains figure for 2007 and performing the same exercise, the difference would have approached $150 billion.

To be sure, the IRS figures do not indicate what portion of the reported capital gains was long term (taxed at 15 percent) or short term (taxed the same as other income). Nonetheless, especially for Blue Dog Democrats and other fiscal hawks, the message is compelling: look hard at Reagan’s tax-equity policy.

The Tax Code was taken in the opposite direction long ago. President Clinton lowered the rate on long-term gains to 20 percent. President Bush cut it to 15 percent, little more than half what middle-class Americans pay on their wages. The Bush tax cuts are due to expire the end of this year, returning the capital gains rate to 20 percent. In addition – with fiscal strain ahead and with Reagan guarding his back – President Obama should map out our return to the equal-tax path.

You can see how Reagan got there by looking into the reason that’s always given for low capital-gains taxes – the claim that buying stocks drives the economy, growing new businesses and new jobs. Nice try, but The Gipper saw through it.

Only a trace amount of all the trading on Wall Street grows anything. Small companies with big dreams raise seed money through initial public offerings (IPOs) and secondary offerings. These investments deserve a bigger tax break than they get now; there’s a strong case for making them tax-free. All other stock market gains should be taxed the same as wages (which they were, back when).

Doing so again would raise the cry that the rich were being hosed to pay for health care. On the contrary: tax equity penalizes nobody – on top of which, America’s taxpayers will never recover the hundreds of billions in restored tax breaks that Reagan, citing fairness, tried to end. How to pay for health care reform? It could be as simple as once more levying equal taxes on capital gains and other income. It’s only fair (and Reaganesque).