Tax cut hopes fading fast

Americans usually relish a tax cut, yet prospects for a prompt, major tax cut are fading.

Here's why:

1. The budget surplus puts President Clinton in a powerful bargaining position with the Republican leadership in Congress.

Under Mr. Clinton's plan, some 82 percent of the surplus would pay down federal debt held by the public, purchase stock for the Social Security trust fund, and subsidize the retirement savings of workers through his USA accounts. Little would be left over for tax cuts.

"If they don't do anything at all, we get Clinton's plan" - at least its basics, says Robert McIntyre, director of Citizens for Tax Justice, a Washington think tank.

Most of the surplus would go into Social Security automatically, improving its future prospects. Any general revenue surplus also buys down the federal debt.

2. Republicans face a risk of being charged with cutting taxes primarily for the well-to-do.

Mr. McIntrye's Citizens for Tax Justice did an analysis of one Republican plan for a 10 percent across-the-board income tax cut. It found that two-thirds of the $1 trillion loss in revenues over the next 10 years would benefit the richest 10 percent of taxpayers.

For 60 percent of taxpayers, making less than $38,000 a year, the average tax break would be $99 a year. The 1 percent of taxpayers making more than $301,000 would save an average $20,697 a year.

A subsequent Congressional Joint Committee on Taxation study found basically the same thing. It also noted that 48 million American households would get no income tax cut at all. They pay Social Security taxes, but little if any income taxes.

"If this is an 'across-the-board' tax cut, then the board must have a lot of knotholes in it," said Rep. Charles Rangel (D) of New York.

3. Republicans are badly divided over various tax-cut plans. The public, according to polls, is as keen on debt reduction and saving Social Security as it is on tax cuts.

And that renowned Republican economist, Alan Greenspan, didn't give tax-cut enthusiasts in the Senate much of a break last week either. Speaking to the Senate Finance Committee, the Federal Reserve chairman said he prefers reducing marginal tax rates - the tax rate on the last dollar earned - to the eye-catching 10 percent across-the-board tax cut.

Marginal tax cuts have a bigger economic bang for the buck.

Mr. Greenspan also indicated he would rather see the budget surplus used to slash the national debt. Debt reduction will bring lower long-term interest rates, he told the senators.

That would boost home building through lower mortgage rates. It would also lower the cost of consumer debt as well as capital for business - raising investment and thereby productivity.

Then Greenspan noted that the economy doesn't need any stimulus at the moment. It's running at full speed already. It might be better to save a tax cut for the inevitable, rainy-day economy.

We may still see a $6 billion to $7 billion reduction in the marriage-tax penalty for couples with middle or lower incomes, says McIntyre

Or Republican leaders in Congress might initiate an income-tax cut that starts small and grows over the years. That will hang on striking a deal with Clinton.

"It is very fluid," says Robert Greenstein of the Center on Budget and Policy Priorities, a Washington think tank. "It is too early to tell."

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