An Exercise in Compromise Rather Than Fiscal Logic

The White House and Republicans have fashioned a budget deal, complete with tax cuts, that is more an artful exercise in the politics of compromise than diligent application of fiscal management. Even so, the bipartisan agreement sets out a welcome course in a time of comparative plenty for balancing the budget and continued deficit reduction, despite the tax cuts.

Have we actually entered the era of the balanced budget? It is too early to draw such a conclusion. From a political standpoint, there was much to gain for both parties from a plan to balance the budget by 2002. The compromise helps the president keep the Democratic Party close to the center as champion of tax relief, traditionally a Republican issue. (The tax cuts are the first major ones since 1981.) For the GOP, the deal helps to divert attention from the backbiting and disarray within party ranks that have resulted from efforts to oust House Speaker Newt Gingrich.

The economy provided a cheerful backdrop for the budget initiative. Government revenues are up nicely, more than expected. The fiscal 1997 budget deficit is projected to be under $40 billion, less than 0.6% of the nation’s annual output of goods and services. Washington figures that we can afford the tax cuts now, though many rational critics find the cuts premature.

On balance, this plan provides something for nearly everyone--families, students, rich investors and the working poor. The cuts total $91 billion, compared to the $85 billion originally agreed upon by Democrats and Republicans earlier this year. It is unclear whether the additional $6 billion in tax cuts exacerbates the problem of “backloading”--pushing off the costs of tax cuts until after 2002. A number of new IRA-style savings plans are worrisome in this regard.

The broad outlines of some of the largest items in the compromise make sense:

* Child tax credits. The biggest concern was that the working poor would not be eligible. The budget accord provides for a phased-in credit of $500 per child that starts at $400 next year, for families earning as little as $18,000--or as much as $110,000.

* Capital gains. The compromise preserved cuts but eliminated indexing for inflation, a potentially huge long-term cost. The top capital gains tax rate will be cut to 20% from the current 28%. The first $500,000 in gains from the sale of a principal residence will be excluded from taxation, retroactive to May 7.

* College credits. A combination of direct tax credits and deductions amounting to a modest $40 million will help finance college costs.

* Child health. Medical care for about 10 million children not covered by insurance is to be financed by a two-step, 15-cent-a-pack cigarette tax that does not begin to kick in until 2000. The delay seems unnecessary.

* Welfare. Coverage under Social Security disability and supplemental payments will be restored to 700,000 elderly and disabled legal immigrants who lost benefits under last year’s welfare reform.

This year, rising revenues made bipartisan agreement a relatively easy task. But what goes up eventually turns down. Lawmakers--and those who are the beneficiaries of these tax cuts--will have to remember when the dip comes that these are not permanent entitlements.

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Federal Income

Government receipts, in trillions of dollars:

1998 revenue: $1.16 trillion

Source: “Monthly Treasury Statement of Recipts and Outlays of the United States Government.”