Can George Bush keep his emphatic “read my lips” promise to protect the American people from new taxes?
The answer, so typical of the muddles that come out of Washington, is both yes and no.
Yes, the President and Congress probably will avoid any raise in the tax rates for individuals and businesses embodied in the 1986 reform act.
But no, he can’t redeem the campaign pledge entirely because of the big federal budget deficit. After a fierce debate, there may well be an increase in some excise charges such as the federal tax on gasoline or the levies on cigarettes and alcohol.
Since these taxes would be extended--rather than inaugurated--Bush would be able to claim that he has remained faithful to the campaign pledge of “no new taxes.”
Because taxes are such a delicate issue, the political maneuvering has just begun, as the Republican President and Democratic Congress circle each other warily.
“We’re certainly not going to bring up taxes,” said Budget Director Richard Darman. “The President has made his position extremely clear. If the other side wishes to bring up taxes, we’ll have to discuss it on the merits. But our position is that the merits don’t require taxes.”
The Democrats, badly burned by the tax issue in two losing presidential campaigns, talk in general terms about revenues, but they want the White House to make the first move. Rep. Dan Rostenkowski (D-Ill.), chairman of the tax-writing Ways and Means Committee, put it bluntly: “I don’t want to go to the bargaining table . . . and be the one that brings taxes to the table.” Instead, he wants an invitation and admission from the White House that “everything” is subject to negotiations.
The President so far has proposed a tax increase that hits a comparatively small group in the population, the state and local employees who currently do not pay the Medicare payroll tax, which is 1.45% of incomes up to $48,000. This idea has been proposed before and defeated after energetic lobbying by union groups. The tax would apply to 2 million workers.
By far the most controversial tax issue is the President’s call for a cut in the capital gains rate, the tax on stocks, bonds, land and other assets that are not depreciated.
He wants to trim the top tax rate for capital gains to 15% from the current 28% rate. Taxpayers would enjoy the lower rate on the sale of assets held more than a year, if they are sold from 1989 through 1992. The holding period would increase to two years for assets sold in 1993 and 1994, and three years for investments sold in 1995 or later.
The proposal was dead on arrival at the House Ways and Means Committee, which writes tax bills. “The committee continues to insist that no fundamental change should be made to the Tax Reform Act of 1986,” chairman Rostenkowski said on Feb. 23, setting forth the official Ways and Means policy.
Democrats denounce the proposal for a lower capital gains rate as a sop to the rich. “Reducing tax rates for the wealthiest 2% of the nation is not going to generate the type of revenue the President is envisioning,” said Rep. Robert T. Matsui (D-Sacramento), a member of the Ways and Means Committee. “I am concerned he is raising expectations too high.”
About 70% of capital gains in 1987 went to about 1 million taxpayers with incomes above $100,000 a year.
But the President is anxious to redeem one of his campaign promises--to cut the capital gains levy as a boost to economic growth.
“Yes, you can cast the capital gains cut as a cut for the higher brackets,” said White House Chief of Staff John H. Sununu, “but the fact of the matter is that its purpose and its historic record is that it does create investment, investment creates jobs and jobs create opportunities for men and women that want to work and earn a living.”
To deflect the charge that only the wealthy would benefit, the Administration wants to eliminate the tax on capital gains for single persons with adjusted gross incomes below $10,000 a year and couples with incomes below $20,000.
However, the capital gains proposal seems doomed because powerful members of Congress see it as a threat to unravel the carefully crafted tapestry of the 1986 tax reform legislation. “I like stability in the (tax) code; I think that’s what the American people expected,” said Rostenkowski, who regards his role in the legislation as the major accomplishment, thus far, of a 30-year congressional career. “I’d like very much to see the ’86 code untouched for several years. This is the first year where we will see the true effects of the 1986 tax cut.”
Rostenkowski said he is worried by the Pandora’s box of changes that could be opened. If Congress considers a lower capital gains tax, perhaps it will become entangled in other issues. Or there might be a new debate about enlarging the Individual Retirement Act, which was restricted. These uncertainties “are the things that frighten me,” said the canny Ways and Means chairman.
And he delivered an unmistakable warning to the White House that forcing the capital gains issue could bring with it something the President is dead set against--higher rates.
“If the President is going to insist on the capital gains reduction to 15%, I see no way we could hold back the majority of the House from increasing the top marginal rate,” he said.
Rostenkowski wants more tax revenues without tinkering with capital gains or the top rates. “I should imagine we can go to a gasoline tax, to the sin taxes, to excise taxes of a sort,” he said.
Another important Democrat, Rep. Leon Panetta (D-Monterey), chairman of the House Budget Committee, agrees on the need for increased tax revenues, combined with a “balance of spending constraints on defense and entitlements.” Panetta said he is willing to “look at some form of energy tax” to raise revenues.
The White House has no enthusiasm for gasoline taxes, which would cut energy consumption, hurting an already depressed industry. Rather than raise the tax burden, the Administration wants to spur energy exploration with some new tax credits for the independent entrepreneurs who drill for oil and gas. Tax and investment credits would help the drillers while costing the Treasury about $350 million a year in forgone tax collections.
Other beneficiaries of Bush tax breaks would include low-income families needing help to pay for child care, people who adopt children, and high-technology companies with big research budgets.
A new tax break is designed to help 2.5 million low-income working families. A tax credit, up to $1,000 for each child under the age of 4, would be provided for families with at least one working parent. The credit would be available for households with incomes up to $13,000 in 1990, with the ceiling rising to $20,000 by 1994.
If the family’s tax credit is more than its tax liability, the family would receive the cash difference from the government.
Some action on the credit is very likely during this session of Congress because both Democrats and Republicans promised child-care legislation during the presidential campaign.
Another candidate for easy congressional approval is the President’s request for a deduction for as much as $3,000 in expenses connected with the adoption of a child with “special needs,” including physical handicaps. The deduction would cover expenses such as social services, legal fees and transportation costs.
The research and development tax credit, designed to help high-technology companies, is scheduled to expire at year’s end. Bush wants to renew it, at a cost of $400 million in lost tax revenues. The persuasive influence of the computer, electronics and semiconductor industries, which have strong friends in both political parties, gives this proposal a good chance for enactment by Congress.
The fate of an “enterprise zones” proposal, which would offer businesses about $1 billion in tax credits for establishing factories and facilities in economically depressed areas, will depend on the salesmanship of former Rep. Jack Kemp, the new secretary of Housing and Urban Development.
Worried about the corporations disappearing under a wave of leveraged buyouts, Congress will be gingerly discussing various proposals to ease the tax burden on dividends.
Today’s tax code makes takeovers financed with debt easy because interest payments on the huge borrowings are deductible. Dividends, by contrast, are twice taxed, as profits to the corporation and then as income to the individual receiving the dividend.
Unfortunately, it’s not a “simple black-or-white situation” to discourage buyouts through the tax code, said Federal Reserve Board Chairman Alan Greenspan. Clever lawyers would soon find ways to circumvent any restrictions on interest deductions, he said. And it costs too much to stop the double taxing of dividends--the revenue loss would be $20 billion to $25 billion a year, Greenspan said.
Some minor changes in the treatment of corporate interest charges and dividends are possible, but a wary Congress won’t risk any big loss of tax revenues.
Bush and the Democratic majorities in the House and Senate seem headed for a clash on taxes. His budget says all of the new tax credits and benefits, costing $4.8 billion, will be paid for by a surge of revenues from cutting capital gains levies.
Democrats want some other route to raise revenues and help reduce the budget deficit. “I don’t know whether we’re going to increase taxes,” Rostenkowski said. “I know you can’t increase them without the President of the United States.”