Tax-Cut Fiasco

Republicans chose not to send President Clinton their newly passed tax bill last month so they could use the congressional recess to try to pump up public enthusiasm for the sweeping measure. How well they succeeded is uncertain, but with Congress back in session they can no longer stall. Their plan--calling for cutting tax collections by $792 billion over 10 years--is headed for the White House this week and a promised presidential veto.

Clinton says he supports some tax cuts, though he certainly isn’t inclined to direct them to the same people the Republicans have chosen. He and most congressional Democrats say they’re determined to keep cuts at a more modest level, in the range of $300 billion. Is there a basis for early political compromise between the GOP and Democratic approaches? Maybe. But even if a deal could be cut it would be based on self-serving pretense and be a hoax on the public.

The surplus revenues that are supposed to generate the proposed tax cuts are based on projections that extend a full decade. Those estimates were made by the same people who just a few years ago forecast that this year’s federal budget would be $200 billion in the red. In fact, the budget showed a surplus. Peering ahead into the murky economic uncertainties of future years, the estimators assume a cumulative surplus of $1 trillion, along with a surplus of about the same size from Social Security payroll taxes. Numbers like these are sweet music to politicians’ ears. Too few have bothered to notice that the orchestra is badly out of tune.

It’s wishful thinking to assume that one or two years of black ink mean the nation has entered an era of perpetual budget surpluses that would justify either huge tax cuts or greater federal spending. Projected surpluses are based on assumptions about all kinds of things--employment, productivity, interest rates, increases in incomes and capital gains, commodity prices--that simply can’t be perceived clearly even a few years ahead, let alone a decade. Downturns happen. Unexpected overseas events ripple through the global economy. Markets sag, recessions occur. And assumed surpluses can very quickly turn into concrete deficits. The Congressional Budget Office warns, for example, that proposed Republican spending add-ons could transform next year’s projected $14-billion budget surplus into an $11-billion deficit.

If surpluses do grow in coming years--a possibility, though far from a certainty--the prudent choice would be to commit them to reducing the $5.6-trillion national debt. The immediate reward, like paying down a credit card balance, would be to lower debt servicing costs, which consume a significant chunk of the federal budget. Among other good things, reducing the debt would make more money available for private borrowing, aiding economic growth. This approach doesn’t have the specious political appeal of promising whopping tax cuts. But it does avoid the costly delusion of mistaking projected surpluses with money already in hand.