PERSPECTIVE ON TAXES : Trust People With Their Money : Reducing the burden is a fine goal, but exemptions can have an undue influence on people’s personal decisions.

Republicans say every family making up to $200,000 a year deserves a $500-per-child tax credit. Democrats say that’s being too nice to “the rich.” They prefer a $75,000 cutoff.

Republicans have already conceded the point. By suggesting an income cap, they’ve admitted that some taxpayers count more than others.

In fact, the GOP tax-cut package embraces the idea that all taxpayers aren’t created equal. Despite their small-government rhetoric, a lot of Republicans are in love with planning other people’s lives, setting other people’s priorities. But unlike the Democrats, with their alphabet soup of bureaus, Republicans rely primarily on one agency to manipulate behavior: the Internal Revenue Service. And, oddly enough, letting the IRS enforce their vision of how Americans should live makes Republicans look like good guys.

Consider the tax bill now before the House. Among other provisions, it would exempt from income taxes the interest earned on “American dream savings accounts”--money for retirement, post-secondary education, medical care or a first home. Republicans point to this provision and the $500 tax credit when asked how they’ll help middle-class Americans.

“Our act,” says the “contract with America,” “is designed to deliver relief from the heavy burden of government and let families keep more of their hard-earned dollars to pursue their own version of the American dream.”

Unfortunately, the talk about “their own version” is boilerplate. Congress decides which dreams deserve special tax treatment. If you save to start a business, buy a car, send your kids to parochial school or move to a larger house, you’ll get hammered with the usual taxes. And if you don’t have children, Washington keeps your $500.

Republicans may denounce regulation, but the impulse to direct Americans’ financial choices is hard to resist. No wonder Newt Gingrich started nodding during the State of the Union address when President Clinton plugged his own scheme to allow $10,000 tax deductions for college tuition. Former professors Gingrich and Clinton agree that education is more important than other goods and services, and Gingrich is naturally attracted to Clinton’s scheme.

Such schemes do sound appealing. But tax-break schemes are snares. Their manipulative premises are dangerous, their practical results often malign.

By lowering the apparent cost of tuition, Clinton’s deduction would simply let colleges raise their prices. The supply of college slots is pretty much fixed, and any increase in demand driven by the deduction will show up in higher prices. Knowing that they’ll get a tax break, students will be willing to pay more for tuition, at least in nominal terms.

Distorting investment decisions through the tax code can have disturbing ripple effects, as many homeowners discovered when housing prices collapsed in recent years. Luring people into six-figure debts by making the cost of owning equivalent to renting (after the mortgage-interest deduction) may promote community stability. But it also turns otherwise risk-leery Americans into speculators. If the local economy goes into recession, these unwitting speculators get stuck with mortgages they can’t unload just when finding a job elsewhere means selling a house.

When Republicans announced their contract, Rep. Dick Armey of Texas attacked the old Democrat-dominated House for having “adopted as its central philosophy the belief that ordinary people cannot be trusted to spend their own money and make their own decisions.” Republicans, he said, “propose to cede back power from the hallowed halls of Congress to the more hallowed kitchen tables of America,” where families “make decisions about education, charity, jobs, spending, debt and values with a wisdom and compassion that no number of agency heads, cabinet secretaries or members of Congress could ever match.”

Reducing Americans’ tax burden is a worthy goal. But Republicans would do well to remember Armey’s promise, a pledge not just to cut our taxes but to let us set our own priorities. Americans don’t need paternalism with a supply-side face.