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This Is A Tax Cut Whose Time Hasn't Come


Economic Viewpoint

This Is a Tax Cut Whose Time Hasn't Come

Having failed to remove President Clinton from office, the Republicans are rallying behind their most reliable flag: the call for a general tax cut. This is a salutary debate the country should welcome. Why a tax cut, and why a tax cut now? And, if a tax cut, what kind of a tax cut?

The GOP case appears simple and persuasive. The money belongs to the people, and the government is taking too much of it--the budget surplus proves it. Rather than dreaming up ways to spend the surplus, the government should return it to the taxpayers, via a 10% across-the-board cut. What could be simpler and fairer?

The case against a tax cut is more complex. One element is budgetary. The last time the Republicans legislated huge tax cuts, in 1981, they didn't produce the advertised spur to growth, revenues, and budget balance. It took the country nearly two decades and four trillion dollars of additional debt before we finally got back to balance and then surplus. Maybe we should let some of that surplus accumulate and pay down the national debt before indulging in another big tax cut.NEAR PERFECT. A second counterargument is macroeconomic. Usually, tax cuts are promoted as a form of economic stimulus. But for the past three years, the economy has been growing at nearly 4% a year, with almost no inflation. It doesn't get much better than that. With interest rates low and the economy near full employment, not even Keynesians are calling for fiscal stimulus.

To protect the budget surplus, we might pay for tax cuts with program cuts. But we cut general government spending dramatically in the 1980s and '90s. Excluding social insurance, general government outlay has dropped from 12.4% of gross domestic product to just 6.6% in 1998. Social Security and Medicare, of course, are consuming more money. But allocating more of our national income for social insurance simply reflects the realities of an aging population.

The Clinton Administration has proposed spending three-quarters of the projected 15-year budget surplus to shore up Social Security and Medicare. Those who prefer a tax cut argue that the money should instead be "returned to the people." But putting budget reserves into social insurance is hardly squandering it. Government is simply returning the money to the people in a different form, by insuring against illness and destitution in old age.

This brings us to the real debate, which is philosophical and distributive. A 10% across-the-board tax cut sounds perfectly fair. But during the past 20 years, the share of total national income has shifted dramatically to the top 10% of the population. Wealth has also become more highly concentrated. Bill Gates all by himself has net worth equal to that of the least-affluent 120 million Americans (nearly half the population).NO RELIEF. Since the wealthiest earn most of the income, they also pay most of the taxes. So an across-the-board tax cut would give most of the benefit to those with the most private income. The top 1% of households (average income of $833,000) would get tax cuts averaging $20,697, according to Citizens for Tax Justice. The top 10% would get 62% of all the tax relief. And the bottom 60%, those with household incomes of less than $38,000, would get tax cuts averaging just $99. And 48 million taxpayers would get no tax cut at all, according to the Congressional Joint Tax Committee.

Indeed, Republican Ways & Means Chairman Bill Archer (R-Tex.), in a recent press release, helpfully observed that people with incomes under $100,000 on average pay only 38% of their federal taxes as income taxes (most of the rest is payroll taxes), while people with incomes over $100,000 pay 75% as income tax. So the GOP's proposed cut, which cuts only income taxes, is not an across-the-board reduction at all.

The GOP's proposed tax cut would cost the Treasury nearly a trillion dollars over 10 years. And we would invariably wind up funding these tax cuts by reducing outlays that benefit people with more modest private resources. Popular programs like Social Security and Medicare would take the hit.

If we must cut taxes, let's target the cuts to those who haven't shared in the recent boom. The best candidate would be an increased Earned Income Tax Credit for the working poor. The second best would be to exempt the first few thousand dollars of income from the regressive payroll tax. Seemingly, the GOP has a sure winner in the call for a general tax cut. But the public also values social insurance, living-wage jobs, and tax fairness. So good riddance to the impeachment follies, and let the tax debates begin.BY ROBERT KUTTNER


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