Fairness and the tax cut
Call it a bold gambit. By speaking to Wall Street and corporate leaders, House Speaker Tip O'Neill carried his case in favor of limiting the third year of the administration's 10 percent across-the-board tax cut to those who would be most affected by any change: namely, taxpayers earning $50,000 or more annually.
As Mr. O'Neill no doubt astutely realizes, the American business-financial community has mixed feelings about the scheduled tax cut. On the one hand, there is concern about the intensity and duration of the recovery. Despite the favorable indicators of recent weeks, consumers are still wary about taking on much new spending. Yet it is a willingness to buy new cars, refrigerators, and other big-ticket items that more than anything else will ensure the durability of the economic rebound. The third year of the tax cut, coming in less than a month now, should help spark consumer purchases.
But, as Wall Street also realizes, the prospect of future budget deficits in the range of $200 billion and up - stemming in part from the huge reduction in revenues under the three-year tax cut program - is contributing to investor and corporate unease about the course of future interest rates. If real interest rates remain high, or rise even higher as the government crowds out private borrowing to finance deficits, the recovery could be aborted. Limiting the tax cut to hold down revenue losses for the Treasury is thus one practical - and symbolic - way of curbing future deficits. It is only a drop in the bucket, of course, and much more must be done by Congress, both by making necessary reductions in spending programs and by tax reform.
Mr. O'Neill's proposal should be given serious consideration. The Speaker proposes limiting the tax-cut benefit to $700 per individual taxpayer or family - which means a reduction in the overall tax cut of roughly $7 billion out of the total revenue loss of $30 billion. It is interesting to note that Mr. O'Neill's ceiling is slightly more generous than would be the case under the Senate budget resolution, which calls for raising some $9 billion in new taxes for fiscal year 1984. That $9 billion revenue hike would mean that the individual taxpayer's gain from the original Reagan tax cut would be about $500 a year.
Limiting the cut to $700 certainly does not gut the measure. But it does restore an element of fairness to the tax cut. The evidence seems clear that most individuals earning more than $50,000 a year have not appreciably cut back on their spending nor savings. In other words, they will continue to buy and save as much as they have in the past - with or without the tax cut. On the other hand, many families at the lower end of the income spectrum are strapped for spare dollars for either new purchases or savings programs.
Yes, there is a need for the July tax cut. But this should be a calibrated cut that fosters new purchasing and new savings programs - without at the same time widening budget deficits that in themselves threaten economic recovery.