Dueling Tax Cuts Claim To Aid 'Middle America'

The battle over whose taxes will be cut this year has become a triangular struggle. In one corner stand Republicans in the House of Representatives; in another, a bipartisan Senate coalition; in the third, President Clinton.

At issue, as always, is which groups in society will, or should, reap benefits from the cuts: lower-income Americans, the middle class, or the wealthy.

Important sub-questions include: Should people who don't pay taxes get money via the tax bill? And what's the right time frame through which to view the bill's effects?

"It all comes down to what your values are and your view of the world," House Democratic leader Richard Gephardt of Missouri said at a Monitor breakfast yesterday. "We're going to have a tax cut... It's just a question of which bill gets put together."

Now the debate moves to the Senate Finance Committee, where chairman William Roth Jr. (R) of Delaware has a new compromise plan that takes the rough edges off a bill passed last week by the GOP-run House Ways and Means Committee.

Roth's draft has support from many committee Democrats, who reportedly have resisted pressure from the White House to offer their own version. Such comity wasn't the case in the House, where Ways and Means Democrats offered their own bill, and none voted for the version proposed by Rep. Bill Archer (R) of Texas, the committee's chairman.

Democrats claim Representative Archer's bill is weighted toward the wealthy. The president and his Democratic allies are upset that in Archer's version families that pay no tax would not get the $500-per-child tax credit. Some claim the tax cuts "explode" in the second five years and thereafter, plunging the government back into deficit just when the budget is balanced.

Republicans counter that people who don't pay taxes shouldn't be getting a handout. That is welfare, they say, not a tax cut.

Depending how the bills are viewed, they can seem to back both sides' claims of defending Middle America.

Time frame is one crucial determinant. When talking about Archer's bill, Republicans point to the first five years: They cite Congress's Joint Committee on Taxation, which says that people making between $20,000 and $75,000 would get 72 percent of the gross tax cuts during that time.

Democrats prefer to talk about the second five years. They claim that while in the first five years middle-income cuts total $94.8 billion and upper-income cuts are $9.2 billion, in the second five years middle-income cuts total $108.6 billion, while upper-income cuts jump to $96.8 billion.

Martha Phillips of the bipartisan, antideficit Concord Coalition, says her analysis of the cuts' long-term effects is "less alarmist" than some. "The revenue loss is greater, but the growth in the tax cuts is not what I'd term 'explosive,' " she says. For example, federal revenues are currently 19.6 percent of gross domestic product (GDP). Under the Archer bill, they dip to 18.9 percent in 2002 and 18.75 percent in 2007, assuming the economy stays healthy.

"That's not a case of the bottom falling out," Ms. Phillips says.

She agrees Archer's cuts are tilted to the wealthy. But, she says, families get almost all the benefits at the beginning, while cuts in taxes on investment profits and inheritances grow slowly.

Phillips also notes lower-income families got a big tax benefit in 1993, when the Earned Income Tax Credit was increased. "A different way of viewing [is] they got theirs in 1993," she says. "Everyone else has to wait until 1998. I can understand what the advocates on both sides are saying."

Meanwhile, Roth's version alters several Archer measures to which Democrats and some Republicans objected. For example, his child tax credit would give parents a $250 credit this year and $500 next, more than Archer's plan. He doesn't allow capital-gains exemptions to rise with inflation. Roth's estate-tax cuts would kick in sooner than Archer's. And the Roth bill does not repeal ethanol subsidies, nor propose taxing Indian businesses as Archer's does. But Mr. Clinton is concerned neither bill provides for his version of education tax cuts.

BASICS OF HOUSE AND SENATE TAX PLANS

* Children

Both give credit of up to $500 per child up to age 17, except for couples with incomes over $110,000. Senate requires credits for children age 13 to 16 to be put in educational savings account.

* College education

Both give a credit of up to 50 percent of $3,000 in college costs for two years. Both allow penalty-free IRA withdrawal for tuition. House gives deductions of up to $10,000 a year.

* Capital gains

Both reduce top rate for individuals to 20 percent from 28 percent and exempt profits on sale of primary home up to $500,000 per couple. Senate gives reductions for venture capital and sale of small business.

* Retirement

Both create new IRAs in which contributions aren't deductible but accrue interest tax free and can be withdrawn tax free after retirement or for buying first home. House drops income limits, Senate expands current limits.

* Inheritance

Both phase in an exemption increase of $1 million. Senate gives additional $1 million exemption for family-owned farms and businesses.