Clinton Tax Plan Had Allies, Foes at White House

Senior Administration economic policy-makers strongly opposed the middle-class tax cut proposal announced by President Clinton Thursday night but lost out to Clinton’s political advisers, Administration and congressional sources said Friday.

White House political aides argued that the sweeping tax cut proposal offered during the fall election campaign by Republicans had to be countered.

Alice Rivlin, director of the White House Office of Management and Budget, tried to rally other economic advisers to launch a last-minute fight against the tax cut, the sources said. But she and others were unable to sway the President in the face of mounting political pressure to announce a tax cut plan.

Rivlin felt “very distressed and lonely” when the President decided to go ahead with the tax cut, sources said.

Other officials said that they shared Rivlin’s concerns about the tax plan. One Treasury Department official said Friday that senior officials in the department were worried that the tax cut package “is not good economic policy.”

“This was not about economics,” the official said. “This was driven completely by politics.”

However, the Treasury official’s boss, Secretary Lloyd Bentsen, said Friday that he supports the Clinton plan because he is convinced that the spending cuts are real.

“My take on it is, if we didn’t pay for this (with compensating reductions in spending), those economists that say that you would take it away from the people by an increase of interest rates are absolutely right,” said Bentsen. “And that’s why we fought so hard to see that it was paid for to the penny and that has been accomplished.”

In a nationally televised address Thursday night, Clinton unveiled a package of personal tax cuts that appears to put the Administration squarely in the middle of a bipartisan bidding war over the hearts and pocketbooks of middle-class voters.

Clinton’s middle-class tax cuts would include a $500-per-child tax credit for children under the age of 13 in families earning as much as $60,000, with smaller credits for those earning as much as $75,000. It also would provide deductions for as much as $10,000 a year in post-secondary education costs.

Clinton also called for an expansion of individual retirement accounts, granting the deduction to couples earning up to $100,000, and consolidation of federal job training programs into a single plan to provide training vouchers for those who lose their jobs. The Administration said that the President’s plan would cost $60 billion over five years.

Reports of internal opposition to the White House proposal came as outside economists criticized all tax cut proposals now on the table. Although many economists conceded that the middle class needs relief from stagnating wages and incomes, they argued that tax cuts of the kind being offered will not provide a long-term cure.

What’s more, they warned that this is exactly the wrong time to be cutting taxes--when the economy is operating at close to full capacity and full employment. As a result, they said, any effort by the White House and Congress to stimulate the economy with a tax cut that will juice up the economy will prompt the Federal Reserve to raise interest rates to apply the brakes and curb the threat of inflation--thus wiping out economic gains from lower taxes.

“It’s bad economics,” said Henry Aaron, an economist at the Brookings Institution, a Washington think tank. “This isn’t the time to be cutting taxes, when the deficit is still large, and we certainly don’t need any stimulus right now. And this could create the environment for a bidding war on taxes, with a steady stream of petitioners asking for their tax breaks.

“I think you will find that most economists share that view,” Aaron said.

Those concerns were widely held by many Administration policy-makers who reluctantly signed off on the Clinton tax plan because they recognized the political momentum behind it and because the President remained committed to spending cuts that would fully offset the revenue lost.

Many analysts, however, believe that any spending cuts should be used for further reduction of the federal deficit--not to compensate for revenue lost because of a tax cut.

Ultimately, sources said, it became clear that Clinton wanted to put a stop to the political beating he has taken for the last two years for failing to live up to his 1992 campaign pledge to provide a middle-class tax cut.

“There is a group in the Administration who wanted to continue to press strongly on deficit reduction and not have any tax cuts,” noted one senior Administration official. “We felt we had started on the path of deficit reduction and we should keep at it.

“But it was clear that the President had a commitment to live up to his campaign pledge for middle-class tax relief.”

The major competing tax plan from the Republicans has come in the House “contract with America,” which has as its centerpiece a tax cut that would provide a $500-per-child tax credit for all children in families with income of as much as $200,000 a year.

Clinton has criticized the Republicans repeatedly for failing to spell out how they plan to pay for their cuts or how they would manage the finances of their separate proposal calling for a balanced-budget amendment to the Constitution.

Yet senior budget analysts have joined Rivlin in voicing concerns that Clinton also pushed ahead without a detailed plan for spending cuts. Clinton said that he would get about $24 billion in savings over five years, largely by consolidating or turning over to private hands major operations at several government departments, including the departments of Energy, Transportation and Housing and Urban Development.

In addition, the Administration plans to obtain another $52 billion in savings by extending the current “freeze” on discretionary spending through 1999 and 2000. Discretionary spending covers the budgets of most major government functions, except entitlements like Social Security, Medicare and Medicaid.

Combined, the White House argues that those savings would give Clinton enough money to compensate for the revenue lost to his tax reductions and still have enough left over to reduce the deficit by an additional $16 billion.

The White House has not yet specified what programs it will cut, however. Vice President Al Gore will announce the specific cuts from the departmental consolidations Monday and several senior Administration officials stressed Friday that the spending cuts from the extension of the discretionary cap into 1999 and 2000 will be identified in the budget that the White House releases in February.

Times staff writers John M. Broder and Ronald Brownstein contributed to this story.

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Comparing Tax Proposals

Both President Clinton and the Republican-controlled Congress have dangled some tantalizing tax cut proposals before the American public. The accompanying charts contrast their impacts on three hypothetical families, according to computations by the accounting firm of Coopers & Lybrand.

Family No. 1

Adjusted gross income of $60,000, earned equally by husband and wife. Two children, ages 12 and 19, and $8,000 in college tuition. No capital gains. Itemized deductions of 22% of adjusted gross income. Individual retirement account contributions of $4,000.

Current law Clinton Republican Adjusted gross income $60,000 $60,000 $60,000 Personal exemptions 10,000 10,000 10,000 Itemized deductions 13,200 13,200 13,200 IRA deduction 4,000 Tuition deduction 8,000 Taxable income 36,800 24,800 36,800 Tax 5,520 3,720 5,520 Child credit 500 500 Total tax 5,520 3,220 5,020

Family No. 2

Adjusted gross income of $100,000 ($40,000 by husband, $60,000 by wife), including a $4,000 capital gain. Two children, ages 12 and 19, and $8,000 in college tuition. Itemized deductions of 21% of adjusted gross income. No IRA.

Current law Clinton Republican Adjusted gross income $100,000 $100,000 $100,000 Personal exemptions 10,000 10,000 10,000 Capital gains exclusion 2,000 Itemized deductions 21,000 21,000 21,000 Tuition deduction 8,000 Taxable income 69,000 61,000 67,000 Tax 14,250 12,010 13,690 Child credit 500 Marriage penalty offset 1,000 Total tax 14,250 12,010 12,190

Family No. 3

Adjusted gross income of $150,000 ($85,000 by husband, $65,000 by wife), including a $10,000 capital gain. Two children, ages 12 and 19, and $8,000 in college tuition. Itemized deductions of 20% of adjusted income. No IRA.

Current law Clinton Republican Adjusted gross income $150,000 $150,000 $150,000 Personal exemptions 10,000 10,000 10,000 Capital gains exclusion 5,000 Itemized deductions 28,941 28,941 29,091 Taxable income 111,059 111,059 105,909 Tax 26,231 26,231 24,934 Child credit 500 Marriage penalty offset 1,473 Total tax 26,231 26,231 22,961

Note: Coopers & Lybrand based its computations on expected 1995 tax rates. The firm said that its conclusions are not precise because Clinton and House Republicans have not disclosed all their proposals -- notably the Republican plans for reducing the capital gains tax and offsetting the “marriage penalty” -- in sufficient detail.