Just for the record, I reject both the Republican tax cuts and the Democrats' critique. Lower taxes, in my view, shouldn't come until the budget is balanced. People should feel the price of government: taxes paid for services received. When the two are split, government becomes lax, because the price of more government is falsely seen as zero. But we are far beyond such a principled debate. Even Democrats advocate tax cuts, arguing that their plan is fairer. The debate gushes partisan cliches.
Start with Republican myths. The $245 billion sounds like a huge tax cut. It isn't. Recall that it occurs over seven years. In this period, the Congressional Budget Office estimates that federal taxes before the cut) will total $12.8 trillion. The $245 billion cut is about 1.9 percent of that. Of course, some people will get more. The plans centerpiece is a $500 tax credit for every dependent child. A family with moderate income (up to say $40,000 to $50,000) and two Children would receive a noticeable tax cut.
But about half of families have no children, and nearly 30 percent of households are singles. Even for higher-income families with children, the effect of the child tax credit would fade. (In 1994 a two-parent family with two children and $75,000 of income paid about $15,000 to $16,000 in federal taxes.) And the rest of the tax cut - Congress is still working on details - is splintered among many highly symbolic reductions.
Consider the most controversial proposal: a capital gains tax cut. Capital gains are profits from the sale of socks, bonds and other assets. Now these profits are taxed at a maximum of 28 percent. The House Republicans would reduce that to 19.8 percent, arguing that a lower rate would spur investment and risk-taking. Gee, there's already an investment boom, with ample risk-taking. The present capital gains tax isn't a major obstacle. A reduction would mostly benefit wealthier Americans by increasing their profits from the sale of existing stocks and bonds.
Although the Republican myths are outrageous, the Democratic myths are worse. To listen to Democrats, you'd think, that every spending cut is needed to provide a "tax cut for the rich." Medicare is being cut to help the wealthy; so are Medicaid, the school lunch program and welfare. The litany is endless. Perhaps this makes good rhetoric, but it flunks first-grade arithmetic.
In the Republican budget, spending is cut about $900 billion between 1996 and 2002 from the levels under present law. That's about 6.2 percent of what the CBO reckons would be spent and nearly four times the size of the tax cut. The Democrats are double, triple and quadruple counting spending cuts as an offset to the tax reduction. Even a one-for-one count ($245 billion of spending cuts for $245 billion of tax cuts) is a stretch. Here's why.
Under the congressional budget resolution, the Republicans can't enact a tax cut until the CBO certifies that their plan would balance the budget by 2002. Once that happens, the CBO assumes that interest rates will drop and economic growth will increase. In turn, these changes further improve the budget balance by about $170 billion between now and 2002. It is these extra savings that, in theory, mainly finance the Republican tax cut. They account for about 70 percent of the total.
The point is that - without a huge tax increase that almost no one favors - the Republican spending cuts are needed simply to balance the budget. If the Democrats don't want to balance the budget, they should say so. If they have $900 billion of other spending cuts, they should say so. But their endless carping about the "tax cut for the rich" merely disguises their own unwillingness to confront the budget deficits. Republicans have made some unpopular choices about government; Democrats have not.
It is not that Republican choices are beyond criticism. Their plan to curb the Earned Income Tax Credit, which provides tax relief for the working poor, is mean and would shrink the net tax cut substantially. But the tax cut is not mainly a giveaway to the rich. Its effects are spread along the income distribution. Even if it were approved, the well-to-do would continue to pay most federal taxes. In 1994 the richest fifth of Americans (a group that begins at about $75,000 of family income) paid 59 percent of federal taxes.
The trouble with the Republican plan is that it has warped the budget debate. Democrats have succeeded, temporarily at least, in turning it into an old-fashioned argument about class, when it ought to be about redefining the role of government. There are legitimate disagreements here, and they ought to be aired. But it is not true - as Democrats imply - that the whole process is being driven by a crass desire to aid the wealthy.
Ideally, Republicans would postpone tax cuts. Congress should discipline itself and see if a projected balanced budget actually occurs. The prospect of future tax cuts would also dampen the temptation to undo some spending cuts. But the Republicans aren't likely to delay the tax cut, in part because they fear that doing so would trigger a voter backlash. This could be true, despite polls showing that tax cuts rank behind deficit reduction in popularity. Americans are so cynical about politics that they'll seize almost any reason to vindicate their cynicism.
But there is a next-best policy: strip the tax cut to its bare political minimum, the child tax credit. The cost would drop sharply (to about $163 billion over seven years, which is almost exactly the size of CBO's expected "dividend" from balancing the budget). And it would be much harder to attack as a giveaway to the rich. The result would be to refocus the budget debate where it belongs: on what government should - and shouldn't - do.
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|Title Annotation:||reprinted from the October 11, 1995 Washington Post; proposed tax cut|
|Author:||Samuelson, Robert J.|
|Publication:||Nation's Cities Weekly|
|Date:||Oct 16, 1995|
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