The proposed tax cut has two parts. The first, which will go into effect upon passage of the bill, makes progress on eliminating marriage and death taxes and reduces capital gains tax. It also extends the research-and-development tax credit from one to five years, which will encourage continued investment in new technologies.
The second part--a 10% across-the-board reduction in federal income tax--is by far the larger portion of the tax relief approved by the House. If approved by the Senate and signed by President Clinton, 1% of this reduction will go into effect at once. The remainder would not go into effect unless the annual interest paid by the United States--to Social Security as well as to individual bond holders--declines from one year to the next.
This new "trigger" was added to the tax bill at the urging of myself and several other Republican members of Congress, who met with House Ways and Means Committee Chairman Bill Archer (R-Texas) for several hours on Wednesday night as the bill was being brought to the House floor for debate. It cuts the overall cost of the tax bill by more than half until the debt owed by the United States is actually reduced.
This part of the tax bill constitutes the first time an incentive--implementation of the across-the-board tax reductions--for Congress and the president to reduce the overall debt owed by the federal government. Thus, a 2.5% reduction in income tax in 2004 is linked to a reduction in the total interest paid by the federal government on its debt from 2003 to 2004; a 5% reduction in 2005 is linked to a similar reduction from 2004 to 2005, and so on until the full 10% reduction, which would go into effect in 2009 if the interest paid on our national debt has been reduced from 2008 to 2009. If any one year is missed, reductions would be postponed by one year.
The result is that next year, the first year of tax reductions, the cost of tax relief would be less than $5 billion, just over 1% of the federal government's budget of more than $1.3 trillion. Any further reductions would depend on reducing debt. And since federal government debt includes that owed to Social Security, which will grow by $88 billion over the next 10 years, at least that amount of public debt must be retired before across-the-board tax cuts in excess of 1% are triggered, assuming constant interest rates. (If interest rates rise, an even greater retirement of public debt will be required. If interest rates fall, the opposite is true.)
This package is the most forceful incentive ever structured to induce the federal government to reduce the debt it owes. It also creates strong incentives for increased savings and investment--which are essential for further economic growth--through lowered capital gains and estate taxes. And, by using the interest paid each year as the measure, this package operates as a brake against a return to deficits if inflation returns, since inflation will push up the interest rate the government is forced to pay on its debt and thus make further tax cuts less likely.
The tax cut package would foster continued economic growth and investment and return tax dollars to hard-working Americans without increasing our national debt. That will keep our economy strong while protecting our children by not piling more debt onto them.