Tax cuts: hype now, money later

On the surface, the tax cuts that Congress began debating this week represent the broadest tax-relief proposals since the Reagan administration cuts in the early 1980s.

Republicans propose the biggest cuts in a sweeping House bill covering everything from sales of fishing-tackle boxes to capital gains and a 10 percent across-the-board reduction of income taxes. It would reduce federal taxes by $864 billion over 10 years, while Senate Republicans envision a slightly smaller cut of up to $792 billion.

But underneath, Americans who expect a quick windfall could easily be disappointed.

First, the cuts would be phased in over 10 years, and even then may total $200 to $500 annually per taxpayer. "For the first two years, Americans wouldn't really feel a substantial reduction," says Stephen Moore of the libertarian Cato Institute here.

Moreover, while some tax measure is expected to pass the Republican-led Congress, a presidential veto could make the ideas mere talking points for the 2000 election.

President Clinton, who has proposed a $250 billion tax cut over 10 years, has already threatened to veto the much larger Republican proposals.

Finally, the tax cuts depend on projections of widening federal surpluses. In the past, such forecasts have proved wildly inaccurate, experts say. "This whole thing has an Alice in Wonderland feel to it," Mr. Moore says.

Yet no matter how illusory the future cash may prove, debate rages over whether to use it for tax cuts or spending increases.

The big surplus

The latest federal budget estimates predict a $2.9 trillion surplus for the coming decade. Mr. Clinton and Republicans in Congress are nearing agreement on a legislative "lock box" to secure $1.9 trillion of that to shore up Social Security and Medicare. That leaves about $1 trillion free.

Republicans are loudly stumping for their bread-and-butter issue of tax cuts. Americans, they say, face a historically high tax burden, with total federal, state, and local taxes consuming nearly one-third of the gross domestic product (GDP) and nearly 40 percent of the budget of a median two-income family.

"The American people are overtaxed," said majority leader Dick Armey (R) of Texas on the House floor earlier this week. "Federal taxes consume about 21 percent of the national income, the highest proportion since World War II," he said. "But ... help is on the way."

The White House and congressional Democrats counter that, if the surplus falls short, tax cuts could tip the budget back into deficit. They urge more spending on Social Security, Medicare, education, and other programs.

"Permanently enacting huge tax cuts on the basis of numbers projected on paper is highly irresponsible," says Ellen Nissenbaum, legislative director at the liberal-leaning Center for Budget and Policy Priorities here.

Democrats also charge that the GOP tax plans are regressive. The bills would mainly cut taxes for wealthier Americans, they contend, while the president proposes savings incentives for low and middle-income Americans.

"Giving away $1 trillion to the very richest in the country ... defies logic," says Rep. Pete Stark (D) of California.

Republicans are unapologetic giving the most relief to those who pay the highest taxes. "In America, the issue is not whether upper-income people need a tax cut. Of course they don't," says Rep. Dave Weldon (R) of Florida. "It's an issue of freedom. It's their money and it does not belong to the government."

Moreover, tax-cut advocates stress that across-the-board cuts in the GOP plan will directly benefit all taxpayers and indirectly stimulate the economy. "Our No. 1 objective should be ... to keep this incredible economic expansion going," says Moore. "A rising tide really does lift all boats."

A full House vote is expected this month on the Republican bill.

What plans would do

Over 10 years, major elements of the House and Senate bills for individuals would include:

*Income tax reduction. The House proposes a 10-percent income-tax cut that would gradually lower the 15 percent bracket to 13.5 percent, the 28 percent bracket to 25.2 percent, and the 39.6 percent bracket to 35.6 percent. A more modest Senate cut would lower the 15 percent bracket to 14 percent.

Under the House plan, a single taxpayer earning $30,000 would get $510 in tax relief, and a family earning $55,000 would get $1,000. The Senate plan would give a middle-income family of four a $450 cut, and a middle-income single person a $250 cut.

*Investment and savings Incentives. The House plan would cut the top capital-gains tax rate from 20 percent to 15 percent for individuals. It would also lower the corporate rate. The Senate would increase the limit on individual retirement account (IRA) contributions from $2,000 to $5,000 per year and end income limits on those contributions.

*Various tax breaks for health-care and long-term-care insurance, school tuition, and married couples who pay more than if they were single.

*Elimination of estate and gift taxes.

(c) Copyright 1999. The Christian Science Publishing Society