Bidding War Over Tax Cuts Seen as Likely

No matter which party controls Congress after today’s elections, Washington appears poised for an expensive bidding war over middle-class and business tax cuts. And Clinton Administration officials and outside analysts are warning that if the bidding gets out of control, the nation could lose control of the federal deficit.

To address the economic frustration expressed by many middle-class Americans, Democrats and Republicans alike seem certain to introduce an array of tax-cut plans in the next few months to relieve the tax burden on working families with children.

In addition, Republicans are now vowing to push for big new tax cuts for business as well as a sharp reduction in the capital gains tax, and Democrats may quickly follow suit with their own proposed tax breaks for business.

What’s more, if Republicans gain control of either the Senate or the House, the conservative wing of the party almost certainly will push aggressively for even sharper individual and corporate tax cuts rooted in “supply side” economic theory.

Those cuts in turn could open the door for Democrats to call for still deeper cuts in a contest to see which party can outdo the other--returning American economic policy to the heady days of the early Ronald Reagan era, when tax cuts led to massive increases in the budget deficit.

Republican control of the House would mean that Rep. Bill Archer (R-Tex.) would become chairman of the tax-writing Ways and Means Committee, while Rep. Dick Armey (R-Tex.), an advocate of supply-side economics, would be in position to become House majority leader. Archer and Armey said in interviews Monday that they believe their party will push hard for both a capital gains tax cut and broad reductions in middle-class taxes.

The result could be intense pressure on the budget constraints imposed in last year’s deficit-reduction plan, which generally requires offsetting any tax cuts with cuts in spending.

Many analysts believe that those budget limits ultimately would stop tax cutting from getting out of control and Administration officials stressed that the White House will not propose any tax-cut plan that busts the budget.

*

“We will not do anything that is not fully paid for under the President’s deficit-reduction package,” said Laura D’Andrea Tyson, who chairs the Council of Economic Advisers at the White House.

Still, a strong anti-incumbent tide in the elections could wipe away such constraints. When tax-cut fever strikes, it is likely to strike equally in both parties.

In 1981, Democrats and Republicans in Congress rapidly expanded the Reagan corporate and individual tax-cut proposals. Indeed, Treasury Secretary Lloyd Bentsen, then a Democratic senator from Texas, was a prime mover in expanding the Reagan tax bill to provide more corporate tax breaks.

The Clinton White House may even set the stage for a new round of tax-cutting. While the Administration has been criticizing Republicans for issuing outlandish campaign promises on economic policy, officials have been quietly working on their own proposals for a middle-class tax cut--though they stressed that no decisions have been made.

If Clinton does push for a tax cut next year, Administration officials and outside analysts said that it most likely will be a per-child tax credit for moderate-income families, which he proposed during his 1992 campaign.

Rob Shapiro, an economist at the Progressive Policy Institute and a former campaign adviser to Clinton, calculated that the Administration could offer a $325 per child tax credit for families earning less than $50,000 a year and pay for it with $12 billion in cuts in tax subsidies for industry and special interests.

That kind of tax cut for working families appeals to Clinton and his political advisers, who believe it is important to live up to his 1992 promise to ease the tax burden on the middle class.

Bentsen would like to combine a tax credit for children with an expansion of tax benefits from individual retirement accounts--a proposal echoed by conservative Republicans.

Still, many senior Administration economic policy-makers are not sure that they can persuade Congress to cut spending enough to pay for such broad tax cuts without eroding the Administration’s commitment to deficit reduction. Still other liberal advisers would like to see any money earmarked for a tax cut go instead to fund Clinton’s “investment” agenda, such as job training and education programs.

Lawmakers in both parties increasingly acknowledge that they are chafing under budget constraints and would like to modify them so that they can cut taxes and increase spending.

House Appropriations Committee Chairman David R. Obey (D-Wis.), for example, plans to reintroduce legislation early next year that would give the President the right to suspend the budget rules whenever the economy begins to lag so that taxes can be cut for low- and middle-income workers.

*

Armey said that if the Republicans take control of the House and Senate, the party will quickly fire Robert D. Reischauer, director of the Congressional Budget Office who is a hawk on deficit reduction, and install a director who will accept supply-side economic theory.

A sympathetic CBO director would be important to Republicans, because the office issues the official budget rules to determine whether changes in tax law will increase the deficit.

A supply-side director almost certainly would rule that tax cuts would increase federal revenues--and thus would not worsen the deficit.