Rush to offer proposals for tax relief brings an equal number of reactions

October 26, 1991|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau of The Sun

WASHINGTON -- There are as many reactions to the political rush to kick-start the economy with a tax break for the middle classes as there are proposals being made on Capitol Hill, according to interviews with economists, tax specialists and academics.

Even the need for a cut is a matter of dispute: Proponents argue that the economy is heading back into recession, opponents that it is slowly coming out of it.

In the House, Democrats lean toward taxing the rich to ease the burden on the middle class. In the Senate, the thrust of proposals from both Democrats and Republicans is to pay for tax relief through cuts in defense spending.

At the White House, President Bush is inclined only toward a cut in the capital gains tax, although his recent drop in opinion polls could push him toward broader cuts.

"I sympathize with the box that most politicians are in now because we have, as a result of the mistaken policies of the 1980s, left ourselves with no leeway," said Isabel Sawhill, an economist with the Urban Institute.

She added: "I don't think we need another tax cut. We are in danger of seeing another bidding war between Democrats and Republicans.

"Partly it is driven by fear that we are going to have a double-dip recession, and if you are perceived as not doing anything about this, going into a presidential election, it's not going to be good for your party.

"Partly, it is, I think, the desire to give the public more goodies."

The proposals, for whatever reason, have been rolling in.

Thursday brought a plan from Sen. William V. Roth Jr., R-Del., to cut 3 percent from all income tax rates except the bracket for those earning $1 million or more. Mr. Roth said that his proposal would save $792 in federal taxes for a couple earning $35,000 a year. He would finance his JOG (Jobs, Opportunity, Growth) plan from cuts in defense and domestic spending.

On Wednesday it was Sen. Jim Sasser, D-Tenn., proposing to use $80 billion in defense funds to ease the middle-class tax burden and boost business activity.

Before that came proposals from Sen. Lloyd Bentsen, D-Texas, chairman of the Senate Finance Committee, who would also use defense savings to allow a $300 tax credit for each child under the age of 18 and expand individual retirement accounts; from Sen. Al Gore, D-Tenn., and Representative Thomas J. Downey, D-N.Y.; from Sen. Phil Gramm, R-Texas, and Representative Newt Gingrich, R-Ga.; from Sen. Bill Bradley, D-N.J.; and from Representative Frank R. Wolf, R-Va.

The rush of tax proposals has overtaken the Congressional Budget Office. The CBO's tax analyst, Rosemary D. Marcuss, said earlier in the week: "We just haven't analyzed them. It's too soon, and there are also so many of them."

Tax specialists at the Center for Budget and Policy Priorities are also poring over the ideas. Ellen Nissenbaum, the independent Washington think tank's legislative director, said that the center's judgment of any tax cut would be based on four criteria:

* An "appropriate manner" of funding.

* Progressive implementation of cuts.

* No addition to the deficit.

* No cuts in domestic spending.

"The answer is very simple, and that is to stick to the model that most of the Democrats have been talking about, where, if you are going to reduce taxes for the middle-income [taxpayer], then you finance it with taxes on the wealthy," she said.

Daniel Mitchell, senior fellow in political economy at the conservativeHeritage Foundation, said: "The recession is George Bush's fault. If he wants to stand in the way of returning money back to the American people, then he's going to be the one to reap the political consequences of that.

"There's no such thing as a bad tax cut. The economy is in trouble,and if we don't have a tax cut to undo the damage of last year's budget agreement, the economy will stay in recession."

Tax cuts, said Mr. Mitchell, would boost government revenues. He added: "People who don't have jobs don't pay taxes. It's as simple as that."

At the liberal Brookings Institution, Alice Rivlin, former head of the Congressional Budget Office, is opposed to new tax cuts. Any tax break, she said, should have been given a year ago. "A year ago we were clearly headed into a recession. Now it's not so clear," she said, adding that the priority should be reducing the budget deficit.

"I think it would be better to leave well enough alone. I am very worried about escalating the deficit in the long run," she said.

The opposite approach is advanced by Thomas C. Schelling, professor of economics at the University of Maryland.

He said: "My feeling is that the long-run disadvantage of having a larger interest payment on the national debt should be subordinated to the importance of immediately raising both investment and consumption."

For Ms. Sawhill of the Urban Institute, any tax cut would take so long to be effective that it would be likely to increase inflation, and, unless it added to the deficit, it would not be a fiscal stimulus.

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