Tax Givebacks Catch Flak From Top Economists

July 2, 1997

Whether Republican or Democrat, most former top presidential economic advisers disapprove of the tax-cut package moving through Congress.

Ironically, none of six former chairmen of the Council of Economic Advisers (CEA) cited as their biggest complaint the one voiced by many Democratic congressmen - that the package mainly benefits the rich.

The objections relate more to economics than to equity.

An income tax cut, one argues, would be a better economic stimulant than the Republican package. Others contend that the money should go toward deficit reduction, not tax cuts.

"It is a bad time to cut taxes, and I don't like the tax cuts, either the Clinton ones or the Republican ones," says Charles Schultze, President Carter's top economic adviser. He'd rather see the money used to deal with funding shortages of Social Security and Medicare in the next century.

"I am not too happy with it," says Beryl Sprinkel, President Reagan's third chairman of the CEA. He'd prefer lowering the income-tax rates. This, he says, would do more to boost economic growth than the cuts in capital-gains and inheritance taxes passed in late June by the Senate and House of Representatives.

Differences in the bills must now be reconciled in a conference committee.

And to escape a veto, congressional Republicans must compromise with President Clinton. On June 30, Mr. Clinton outlined his proposals with a goal of providing more relief to the middle class.

Herbert Stein, President Nixon's second-term CEA chairman, dislikes the capital-gains tax cut, but for a different reason from Mr. Sprinkel's. "Capital gains already get preferential tax treatment," he says. They are not taxed until realized and not at all at death.

Murray Weidenbaum, who served Reagan in his first term, would rather see a reduction in the budget deficit than tax cuts. The Washington University, St. Louis, economist notes that the tax cuts in the package are coming in the 20th century, while the more politically sensitive reductions in spending have been put off to the 21st century.

Reagan's second CEA chairman, Martin Feldstein, describes the package as only "so-so." He likes the expanded individual retirement accounts and capital-gains relief. The Harvard University economist says tax credits for college tuition are the "least justifiable."

The most positive reaction among the six is that of Paul McCracken, top adviser in Nixon's first term.

"In general, I am all for tax reduction," he says. If taxes aren't cut, Congress in a few years will face "reduced discipline on the spending side." The University of Michigan economist figures the budget deficit is so small it is not a major economic factor.

On many issues the six economists had diverging views.

Mr. Schultze, now at the Brookings Institution, says tuition tax credits would reward mostly those already planning to attend college. A 20 percent top rate on capital gains would prod people to convert ordinary income into capital gains, reviving tax dodges.

Mr. Weidenbaum says the $500 per child tax credit helps a "wide array" of families, but does little to expand the $8 trillion economy.

Indexing capital gains against inflation, provided in the House measure, has "stronger intellectual support" than a capital-gains tax-rate cut, he says. But indexing is opposed by the White House and thus unlikely to survive in the final legislation.

Sprinkel complains that with the bustling economy bringing in unexpected tax revenues, Congress has stepped up spending.

"That wasn't the Ronald Reagan approach," he says.

On the rich-poor issue, Mr. Stein notes that Democrats will portray the legislation as "a rich man's tax package, which it is to some degree."

He says the nation should spend more to help a disadvantaged underclass. "There is nothing here for the poor," he says.

Mr. McCracken defends the package for encouraging "particularly productive members of society" to be more productive.

But, he concedes, it will "be easy to shoot down politically."

Already on the floor of the House, one Democrat last week charged that the package was a Republican "tax fairy" sprinkling tax cuts on the wealthiest.

The Center on Budget and Policy Priorities finds that the House tax-and spending-package gives 87 percent of net benefits to the top 20 percent of Americans, once the changes are fully effective. Those with incomes in the bottom 60 percent would share just 4 percent of the benefits.

A Wall Street Journal/NBC poll found Americans prefer the Democrats' mix of tax cuts by almost 2 to 1.