Tax-Politicking Season

With the Republican and Democratic conventions around the corner, the congressional race for best tax cutter is on. So far, it has produced legislation to eliminate the estate tax and the so-called marriage penalty tax. Both started out as measures to remove fiscal inequity or hardship but strayed from that purpose. Pure politics is, as always, a bad foundation for fiscal policy. President Clinton should make good on his word and veto both measures, despite GOP protestations Wednesday that a compromise version of the marriage penalty bill has been scaled back sufficiently to earn his signature.

There are plenty of reasons not to stimulate growth by giving taxpayers more spending money right now. Consumers are already spending prodigiously, and the proposed cuts would endanger the Federal Reserve Board’s effort to slow the economy without plunging it into a recession. Nor are the proposed cuts part of a well-thought-out plan to reform the country’s complex tax law. They are pure political opportunism fed by the ever-increasing budget surplus projections.

A case could be made for the reform of the estate tax to make sure farmers and small business owners whose assets are tied up in land or equipment don’t have to sell their property in order to pay estate taxes. But only a tiny portion--3% in 1998--of the already small minority of Americans rich enough to pay the estate tax represents small businesses and farmers. (The tax, which now applies to inheritances worth $675,000 or more, will increase to $1 million by 2006.) Most of the benefits would go to the 2,000 richest families in America.

The marriage penalty tax cut goes beyond removing a quirk in the ineptly written tax law. Its political appeal to both voters and campaign contributors is so great that Clinton, who had opposed it earlier, said he would sign it in exchange for congressional approval of an expensive Medicare drug benefits package. He should veto it, not horse-trade it.

These huge tax cuts and others proposed by both parties are not fiscally prudent, despite the projections of a $2-trillion non-Social Security budget surplus over the next decade. First, the anticipated revenue surplus is based on rosy but uncertain predictions of an unending economic boom. Even if the boom continues, however, the surplus is being undermined by reckless spending. One study, by the conservative Cato Institute, concluded that the Republican-controlled Congress “is on pace to be the biggest-spending Congress on civilian programs since the late 1970s.” Neither party has the stomach to limit spending to the levels that helped to produce the surplus in the first place.

Of course, not all tax cuts are bad policy, and during a good economy is the time to consider reductions, but this year’s political frenzy has erased sound economics, prudence and fairness from the process. The tax-cut race is one that both parties should lose.