Whose Is the Best Tax Plan for the Working Stiff?

The real issue this fall is not whether to cut taxes. It is how much to cut them--how, and for whom. As matters stand now, there are some similarities but huge differences between the proposals of President Clinton and those of his Republican challenger, Bob Dole.

The $500-per-child tax credit offered by Dole is the major element in his plan offering benefits to the middle class. It would be available in full for families with taxable incomes of up to $75,000 and dependents up to the age of 18 and would phase out completely at incomes of $110,000. The congressional Joint Committee on Taxation, or JCT, has estimated the annual cost in tax revenues by 1999, when the credit would be fully in place, at $18 billion.

Clinton also proposes a child tax credit of $500. His more modest plan would cover children up to the age of 13 and families with incomes of up to $60,000, and would phase out completely at incomes of $75,000. It would thus apply to fewer taxpayers than the Dole credit but would nevertheless provide tax relief to 19 million families with 37 million children. The Office of Management and Budget estimates the 1999 tax loss to the Treasury at $8.9 billion.

Dole would include in taxable income only 50% of Social Security benefits instead of the 85% enacted in 1993 tax legislation for retirees with relatively higher total incomes. The JCT estimates this revenue loss at $4.9 billion in 1999. It may be worth pointing out that this would be a loss to the Hospital Insurance Fund (Medicare, Part A), to which, under current law, the taxes on that extra 35% are credited; the Social Security trustees have warned that under current law that fund will be exhausted in five years.

Dole would cut all capital gains taxes in half, reducing the maximum rate from 28% to 14%. Estimates of the resulting revenue loss vary widely because of varying predictions of how much taxpayers would increase their taxable sale of assets, which created $144 billion in gains in 1994.

The Republican-controlled Joint Committee on Taxation estimates that tax revenues would increase greatly as investors took advantage of the lower rates to realize previously locked-in gains. The JCT says revenue losses would come to only $1.9 billion annually in 1999, rising to $6.3 billion by 2001. If capital gains realizations settle down after an initial surge, more sober estimates of the revenue loss in 1999 would be on the order of $10 billion to $20 billion. And those do not allow for further losses in revenue as taxpayers would increasingly find ways to convert ordinary income into lower-taxed capital gains.

Clinton would not reduce capital gains taxes in general, but he would almost completely eliminate those relating to the sale of homes. The Treasury estimates that this would cost a total of $1.4 billion in the next six years.

The largest item by far in the Dole package is the 15% across-the-board rate reduction. When fully phased in, this would cost $90.6 billion in 2000, according to the JCT. The figure would rise to $101.6 billion in 2002, when the budget is supposed to be balanced.

Much of the Clinton tax cut program is focused and purposeful, rather than general. It proposes a $10,000 tax deduction for education and training expenses, including college tuition, that would provide benefits of up to $2,800 for families with incomes of up to $100,000. It would also include a $1,500 refundable tax credit for the first two years of college. This means that those too poor to pay income taxes equal to the credit, or to pay any income taxes at all, would actually receive payments. This could affect a significant number of taxpayers. Of 116 million personal income tax returns filed in 1994, about 28 million showed incomes so low as to incur no tax liability.

In his nomination acceptance speech, Clinton also proposed a new tax incentive to encourage employers to hire workers off the welfare rolls.

The Office of Management and Budget estimates the total revenue loss of all of the Clinton proposals, other than the tax incentive for employers and the capital gains tax reduction for home sales, at $17.5 billion in 1999 and $23.2 billion in 2002. The Joint Committee on Taxation puts the Dole losses at $101.4 billion in 1999 and $129.9 billion in 2002.

Dole promises: 1) to balance the budget while offering huge cuts in taxes and 2) to increase defense expenditures while protecting Social Security and Medicare, the major elements in the budget. It would seem virtually impossible to keep the first promise without closing down most of the government for good or, as acknowledged by Dole campaign co-chairman Sen. Alfonse M. D’Amato (R-N.Y.), breaking the second promise.

I doubt that “balancing” the budget in 2002, certainly in the way we currently measure it, would be good for the economy. It might well bring us into a recession and would prevent much-needed public and private investment vital for our future. But the supply-side argument that the tax cuts will significantly pay for themselves has little support among impartial economists. Tax cuts can indeed stimulate the economy from the demand side if they are not nullified by losses in purchasing power and demand because of corresponding cuts in government expenditures. The Reagan administration tax cuts did stimulate the economy and thus lessen the loss in tax revenues, but precisely because they were accompanied by vastly increased government spending--for the military.

But aside from the question of which government outlays would be reduced and who would suffer from those cutbacks, the critical issue is who would benefit from the tax cuts and what their effect would be on the economy. The Clinton cuts, while modest, would be focused largely on education and training. The beneficiaries would be those in the middle and lower classes. The cuts would, in the long run, presumably narrow the income gap between the less-educated and those with college degrees. To the extent investment in human capital is perhaps the major factor in economic growth, this would be a productive investment in our future.

Despite the Dole camp’s (widely disputed) claims that the capital gains tax cuts would have a significant effect on total investment and growth, Dole’s program consists largely of giving taxpayers more after-tax income to spend as they wish. Who, then, would benefit? Dole’s 15% rate cut would obviously be of much greater benefit to the wealthy. And the middle-income family earning $35,000 cited by Dole in his tax proposal earns less than 1% of its income from capital gains, whereas the millionaire receives on the average about 25% of his or her income in taxable capital gains.

Citizens for Tax Analysis, in an illuminating preliminary examination of the Dole plan, offers predictions that should come as no surprise. The 1.2% of families with incomes of more than $200,000 would receive 27.9% of the tax benefits from the Dole package. The 76.1% of families with incomes of less than $50,000 would receive 24.5% of the benefits. The average tax cut for the 56% of all families with incomes of less than $30,000 would be $160. The average cut for those with incomes of between $100,000 and $200,000 would be $4,100; for the group earning more than $200,000, it would be $25,200.

The issues then become clear. It is not who is for raising taxes and who is for lowering them. Both Clinton and Dole have acted to raise taxes and to lower taxes in the past. Both propose to lower taxes now.

My own recommendation would be for expanded tax cuts or direct government support or subsidies for education and jobs. These would do the most both to help those who work for a living--and those who don’t but want to--and for the growth of our economy as a whole.