GOP puts massive tax cut in Clinton's way

Republican package faces veto by the president, setting up fight in 2000 election.

Having hammered out their differences, Repub-licans in Congress are set to pass the biggest tax relief package since the era of Ronald Reagan - a package that has something in it for every American taxpayer.

In some modest ways, the compromise between House and Senate Republicans moves closer to positions Democrats might support. But its very size - $792 billion over 10 years - makes a veto certain by President Clinton, who sees it as a threat to the economy and programs like Medicare.

If the GOP is unable to reach a deal with the White House this fall, as most analysts predict, Republicans have set the contours for a national debate on taxes as the 2000 elections near.

"We're going to have an honest debate about two radically different visions," says Marshall Wittmann, congressional analyst at the Heritage Foundation here.

Republicans believe their plan will resonate with Americans. Their vision - set for a vote in the House today, followed by the Senate tomorrow - would have significant implications for the American taxpayer:

*Lower brackets. The tax plan would gradually cut one percentage point off each of the five personal income-tax brackets.

Unlike the original House plan, which would have greatly benefited wealthy Americans, this plan favors middle-income Americans. That's because the one percentage point drop means proportionally more to someone in the lowest tax bracket than in the highest. The original House plan would have cut all brackets by the same proportion (10 percent).

*Alleviating the marriage penalty. To take the sting out of the so-called "marriage penalty," in which some couples pay more in taxes than if they were single, the GOP bill would gradually raise the standard deduction for couples until it is double the level for individuals.

It would also widen the 15 percent tax bracket for couples, so that it would apply to some income that is now taxed at 28 percent.

This will help two-income couples who take the standard deduction rather than itemize. But tax specialists say the marriage-penalty issue is far from clear cut. While 42 percent of couples pay a "penalty" averaging $1,400, slightly more couples enjoy a "bonus" of about the same amount, says Joel Slemrod, a University of Michigan tax specialist.

*Incentives to save. Contribution limits to individual retirement accounts would gradually rise from $2,000 to $5,000 annually. This appears to be a nod toward Democrats, who favor tax cuts that stimulate savings.

Gains for wealthy

While these first three measures would have far-reaching effects on middle-income earners, the GOP plan also takes care of the wealthy:

*Estate taxes. Only 1.5 percent of Americans pay estate taxes, but the GOP tax bill calls for its gradual elimination.

The government doesn't dip in for taxes until an estate exceeds $650,000 - but after that, the tax rises quickly until it reaches 55 percent. Republicans complain that this is especially burdensome on those who inherit farms or family businesses. This claim is highly exaggerated, contends a study in the July issue of Tax Notes by Charles Davenport of Rutgers University in Newark, N.J.

*Capital-gains taxes. While the GOP plan provides no cuts in the corporate capital-gains tax, it does whittle individual capital-gains taxes - of concern to Americans who are now more heavily invested in the stock market than in the past. Under the GOP plan, the personal capital-gains tax would be reduced from 20 percent to 18 percent for some gains and from 10 percent to 8 percent on others.

Again, say tax specialists, this category of tax relief benefits the well-to-do. About two-thirds of households that pay capital-gains taxes earn over $200,000 annually.

The GOP plan contains several elements that some Democrats have supported, including the lowering income-tax brackets, alleviating the marriage penalty, and incentives for retirement savings. It's the size of the package that Democrats most object to.

Size of cut as key issue

"We've advocated these things. But we can only give the tax cuts that we can afford," said Senate minority leader Tom Daschle of South Dakota.

Senator Daschle and the White House argue that before nearly $800 billion gets sent back to taxpayers, Washington should secure Medicare, pay down the national debt, and preserve defense, education, and law enforcement.

Republicans, afraid Washington will waste the federal budget surplus, want to give the bulk of it back to Americans. Democrats want to "invest" it by paying off debt and shoring up programs. After that's done, they'd give as much as $300 billion back as a tax break.

"Sometimes people see confrontation as all negative," says Daschle. "This is the sound of democracy. It's good for this country to have debates like this."

*Staff writer Gail Russell Chaddock contributed to this report.

(c) Copyright 1999. The Christian Science Publishing Society

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