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Taxes And 2008 Politics: Devil In Details To Come

The 2008 presidential race will produce a sharp debate over tax policy--on individuals, estates, investments and corporations. But voters will have to wait for the general election to hear it. That’s because there’s substantial agreement on the biggest policy questions within each party’s field of primary candidates. And for now, those broad areas of consensus have left primary rivals to bicker at the margins.

Top Republican contenders Mitt Romney and Rudy Giuliani are prime examples. While Mr. Giuliani boasts of cutting taxes 23 times as New York City mayor, Mr. Romney notes that “There are some taxes he actually fought to maintain,” including a levy on suburbanites commuting into the city. The ex-Massachusetts governor also suggests the national front-runner has been slow to spell out his tax ideas and sign a conservative “no-new-taxes” pledge.

Mr. Giuliani levies similar charges against Mr. Romney. Though Mr. Romney advocated state income tax cuts and succeeded in cutting capital gains taxes, “There were no broad-based tax reductions during his four years,” asserts Paul Cellucci, a Massachusetrs Republican who preceded Mr. Romney as governor. “The question is whether he has the instincts and the ability to convince the Congress to do that.”

But trash-talk like that obscures what the two men agree on: making President Bush’s tax cuts permanent, reducing corporate tax rates, opposing tax hikes on private equity executives and eliminating the estate tax. Both candidates, says veteran anti-tax activist Grover Norquist, are “heading in the right direction.”

The same is true among top Democrats in the race. Hillary Clinton, Barack Obama and John Edwards all propose to revert to the 39.6% top individual tax rate that President Bill Clinton bequeathed Mr. Bush before the latter’s 2001 tax cuts. All would raise taxes on private equity managers and preserve the 45% estate tax rate on some multimillion dollar estates.

“There are two things the tax code is supposed to do: raise enough revenue to support the government and smooth the rough edges of capitalism,” says Bob McIntyre of Citizens for Tax Justice, a leading voice in Democratic tax circles. “All of them are inclined to do that….to varying degrees.”

Among those varying degrees is this: Mrs. Clinton and Mr. Obama would reverse Mr. Bush’s tax cuts for those with incomes above $250,000, while Mr. Edwards would reverse them for incomes over $200,000. Mr. McIntyre dismisses that difference as minor.

More consequential may be Mrs. Clinton’s statement that she would let the Bush tax cuts for high-income families expire in 2010 rather than seeking an immediate increase upon taking office--as Mssrs. Edwards and Obama have pledged to do. “That’s a significant difference” in lost government revenue, Mr. McIntyre says. The Edwards campaign estimates that waiting could deprive a new administration of $156-billion in revenue.

And while her chief rivals have pledged to hike Mr. Bush’s 15% tax rate on capital gains--Mr. Obama to 20%, Mr. Edwards to 28% for households earning $250,000 or more--Mrs. Clinton has declined to state a position. In some ways, that’s not surprising for a senator from the financial capital of New York. But Mrs. Clinton has also sought to project an image of balance and centrism on economic policy, in tune with her husband’s administration, while receiving Wall Street backing for her presidential bid.

Sen. Chris Dodd of Connecticut, who chairs the Senate Banking Committee, has been similarly wary of tax hikes on investors. While consistently opposing Mr. Bush’s tax cuts, the longshot Democrat has declined to embrace proposals for higher taxes on hedge fund or private equity executives.

The biggest remaining wild card in the race is Republican Fred Thompson, who’s expected to enter the race next months. “There have been some worrisome signs that he will be weak on taxes, which is rather bizarre for a candidate who wants to become the next Reagan,” says Dan Mitchell, a tax expect at the Cato Institute. Mr. Norquist points to Mr. Thompson’s refusal so far to rule out higher taxes as part of a solution to the looming insolvency of Social Security and Medicare.

Mr. Thompson has also edged away from suggestions that he favors a radical overhaul known as the “Fair Tax” – which would junk the income tax altogether in favor of a national sales tax. Former Arkansas Gov. Mike Huckabee is using that cause in an attempt to lift his longshot Republican campaign, but no top-tier contender in either party is yet pushing that idea or any other fundamental revision of the Internal Revenue Service code.

Questions? Comments? Write to politicalcapital@cnbc.com.