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Geoff Colvin
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Tackling the tough ones
If President Bush is even remotely successful at achieving his second-term agenda, the effects could be momentous.

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President Bush couldn't have been clearer about his second-term agenda, and if he's even remotely successful at achieving it, the effects could be momentous for every American.

At a press conference last week, the President stated flatly that his short list of goals included thorough tax reform and Social Security reform. This is classic second-term stuff: No longer concerned with being re-elected, a President can go after the most difficult policy objectives. And certainly these are bears -- but beyond that, they're markedly different as goals, with widely different prospects.

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» Bush agenda discussion,
Nov. 5, 2004
» Fixing social security

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Tax reform is not mandatory -- it's what business people call a nice-to-have, as distinct from a got-to-have. Everyone agrees the tax code is an abomination, but it does manage to bring revenue into the Treasury, and it isn't strangling the economy, which has been growing for three straight years now -- and even job growth seems back on track, especially after the last Friday's blowout employment report.

So while lots of people want tax reform, they don't agree on what kind of reform. The President's views are well known: He wants the tax code to encourage Americans to save and invest more. It's a worthy goal. As individuals we save hardly any of our income, and at the federal government level we are saving nothing at all -- on the contrary, we've been spending much more than we take in. With millions of baby boomers soon to retire, this is an insane and untenable position.

So how do you encourage people to save? The most radical approach -- at least it's radical for us Americans, though it's common in much of the world, especially Europe -- is a national sales tax. In the purest expression of this philosophy, that would be the only tax on individuals. As a result, the only money you would get taxed on is the money you spend. Income that you save would be totally tax free. Imagine how that tax system would influence your spending and saving behavior.

Though many tax experts advocate a national sales tax, it won't happen here, at least not in the next four years. Too extreme. But other changes are more likely. For example, IRAs could be made much more liberal, or even unlimited. Remember, money you put into an IRA is tax-free until you take it out. Today, only taxpayers with incomes below certain threshholds can make tax-free contributions, and those contributions are limited. Taking the shackles off could spark a burst of saving.

Besides reforming the tax code, President Bush also wants to make it simpler. A laudable desire, but good luck. The tax code builds up complexity like a ship's hull accumulates barnacles. You can clean it up from time to time, but the effect is temporary.

Social Security reform, unllike tax reform, is mandatory. It's a got-to-have. Pollyannas point out that Social Security's so-called trust fund isn't projected to go bankrupt until 2029, so there's plenty of time to phase in a solution. But in reality the crisis will begin much sooner. It starts when Social Security payments become larger than the interest generated by the special government bonds in the trust fund -- and that is projected to happen in just seven years. At that point, we'll begin paying benefits out of general tax revenue, making the federal deficit steadily larger.

Again, President Bush's preferences are no secret. He favors partial privatization (though that word has been expunged from his vocabulary). Workers would be allowed to put a small portion of their Social Security taxes into accounts they would own and could control, probably subject to certain restrictions. That's progress, in a sense. Many workers believe they currently have a Social Security "account" into which their payments are deposited, there to grow safely until retirement. But of course they don't -- today's Social Security tax payments are used to pay today's retirees. Partial privatization would give workers a retirement account they'd actually own.

But many people believe they currently have something even more valuable -- a promise from the U.S. government. Actually they don't have that either. But in practice Washington isn't going to cut people off. What has to happen, though no one wants to talk about it, is a reduction of benefits and a postponement of the age when people qualify for them. If you're 60, don't worry. But if you're 40, the rules are going to change substantially for you.

President Bush probably won't achieve radical reform of taxes or Social Security, but he'll almost certainly achieve something. And we won't be in suspense for long about what it is. As he said at his press conference, he has built up some political capital, and he intends to spend it. He also knows that political capital, unlike financial capital, tends to evaporate rather than grow with time. He has a year at most before his is gone.

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