Budget Nearly Balanced--but Tax Plans Aren’t

Thanks to a booming U.S. economy, the federal budget may soon be balanced, after all. But how?

Some credible projections indicate that a budget surplus may materialize within a couple of years, well before 2002, even without the fragile deal worked out by the Clinton administration and the Republican leadership in Congress. As the economy and the stock market surge, tax revenue keeps coming in far faster than predicted.

It was only in January that the Congressional Budget Office was projecting the 1997 deficit at $124 billion. By May, the figure was down to $67 billion. Widespread current projections are running to $50 billion and below.

In the face of this, are painful spending cuts--in Medicare, for example--necessary to balance the budget? And if there are to be tax cuts, what should they be and to whom should they go?

There are two possible justifications for tax cuts: 1) that they will help the economy as a whole, creating more jobs and more income and 2) that they will help certain people or households deserving of help. The plans of both the president and the Republicans in Congress would cut taxes $135 billion--or $85 billion on a net basis--over five years.

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So how do the two plans stack up?

First, both would cut capital gains taxes--Congress by reducing the top rate from 28% to 20% and Clinton by excluding 30% of the gains from taxation. The top rate is applicable to the great bulk of gains, received by those in the 39.6% bracket whose taxable income is more than $263,750. Clinton would lower the top rate only slightly--from 28% to 27.72%.

Most economists who have studied the issue see little theoretical support or evidence for the proposition that any kind of capital gains tax cut will do much for the economy. It has hardly proved necessary in the stock market’s meteoric and sustained rise. And the enormous boom of the information revolution has proceeded very well without cuts in capital gains taxes to further the raising of venture capital.

As for what it does for those who need it, the president’s plan is not skewed to the very rich. But hardly any capital gains taxes are paid by the poor or middle class who might deserve some help. By either test, both capital gains tax cut plans should be junked. If taxes are to be cut, there are much better places to cut them.

Similarly, it is hard to see that any general cut in estate taxes, such as the Republicans propose, can be justified, either for the sake of the economy or those who may need help. Even ignoring all the loopholes, there is currently no tax until a couple’s estate exceeds $1.2 million.

Is the Republican proposal to raise this exemption eventually to $2 million going to help any except the very rich? A sensible reform would be to drop the tax on estates altogether but include gifts and bequests, like other income, in the tax base of those who receive them. But that is apparently too sensible to be under serious consideration.

Then there are the child tax credits. Both plans would eventually offer $500 per child up to the age of 17. The Republicans’ plan would go to families with income of up to $110,000, Clinton’s up to $75,000.

But the critical difference is that the Republican child credit would not be refundable; it would relate only to income taxes, and the very large proportion of lower-income Americans who pay little or no income taxes--but are in the greatest need of child support--would get little or nothing.

The president is insisting that the credits not entail a loss of the earned income tax credit received by millions of low-paid workers and that it be applicable to payroll taxes. Thus, a worker with two children and annual wages of $16,129, who would receive nothing in the Republican plan, would save $1,000 in payroll taxes under Clinton’s plan. The extra $1,000 would also be an important incentive to those hoping to get off welfare and into jobs--if they can find them.

The college education credits in both plans are gravely deficient, the Republican plan somewhat more so. Its formula is 50% for the first $3,000 of tuition, so that the lower-income student at a community college with, say, $1,200 of tuition costs, would get only $600. The Clinton proposal, now put at 100% of the first $1,000 and 50% of the second $1,000, would give that student $1,100. The Republican plan offers full benefits only to the relatively rich who are paying higher tuition at more expensive colleges.

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But neither plan addresses our real needs. Income distribution has been getting more and more unequal in this richest economy in the world. Indeed, by all measures, our income distribution is the most unequal, by far, of any of the major industrial nations. The rich continue to get richer--much richer--the poor get poorer, and much of the middle class struggles to stay even. Low incomes at the bottom are clearly associated with lack of education, beginning with nursery school--indeed, beginning at birth with learning in the home.

Tax credits and subsidies--or outright spending, if that word is not too dirty--should be directed at offering all the education and training possible, in day-care centers, kindergarten, elementary and high schools and college. The college aid should go to those really excluded from college because they cannot afford it. It should not be wasted on the relatively rich who are paying tuition of more than $20,000 at Stanford, Caltech and Northwestern.

All in all, the president’s tax proposals are better from the standpoint of equity and fairness than those coming from Congress. The Republicans may well worry that if they persist in battle with the president, the voters’ perceptions that they favor the rich will be sharpened and cost them dearly in the 1998 elections.

But perhaps, with the prosperous economy continuing to eliminate the deficit, we should junk the whole budget deal and put our money where it will really do some good.