Choosing From the Tax Cut Menu


October 31, 1991|By TRB

WASHINGTON — Washington. -- It was a black day in 1985 when Dan Rostenkowski was seduced by respectability. I didn't think so at the time. Like other advocates of tax reform, I was delighted when the chairman of the House Ways and Means Committee abandoned a lifetime of hack politics.

His famous ''write Rosty'' TV address, endorsing reform efforts, won him plaudits for high-mindedness and bipartisanship from which he apparently has never recovered.

Now, Representative Rostenkowski stands as perhaps the principal obstacle to Democratic efforts to seize the political offensive with a tax cut for the middle class.

He worries that it would be irresponsible, given the deficit. He worries that it might lead to new loopholes. And perhaps he is not as eager as he ought to be, now that he's chummy with the Republican president, to put his pal on the spot.

By now there are so many tax cut proposals floating around Washington, from both parties, that it's best to think of them as one big Chinese restaurant menu. Design a meal to suit your own taste.

In column one are the tax breaks themselves. Choose one or more. There's Pat Moynihan's old standby, cutting the Social Security payroll tax. There's a per-child tax credit for families (Tom Downey and Al Gore, Lloyd Bentsen). There's an expansion of independent retirement accounts (Mr. Bentsen, various Republicans). And of course there's a tax break for capital gains, either in general (President Bush) or in some selective way (various Democrats).

In column two are methods of payment. Choose one. There's raising taxes on the wealthy (Mr. Downey and Mr. Gore). There's slicing the military budget (Mr. Bentsen). Or there's ''Put it on my tab'' (almost everyone else).

In column three are reasons for the exercise. Choose any or all. There's reducing the middle class tax burden, which is higher now than before tax cutting began in 1978. There's jump-starting a stalled economy. And there's increasing saving and investment for long-term growth.

So. What shall we have? One problem is that all these dishes take time to prepare and -- however delicious going down -- time to digest as well. They are unlikely to have any short-term stimulus effect on the economy. This is especially true if they are honestly paid for with spending cuts or compensating tax increases, in which case the net stimulus is nil.

The two proposals aimed at long-term growth -- expanding IRAs and the capital gains cut -- are snake oil. IRA contributions are already deductible for most people.

Prosperous folks who don't now qualify will just take the deduction for money they're saving anyway. And if expanding IRAs did lead to increased savings, that would mean decreased spending -- and so much less short-term stimulus.

The case against a capital gains break, fairness aside, is that the tax code should be as neutral as possible, neither encouraging nor discouraging one form of economic activity over others. Let the market work. For that reason, a capital gains cut ''balanced'' by an increase in the top tax rate is particularly foolish. What produces tax shelters, empty office buildings and other wasteful activity is the size of the differential between favored and unfavored categories.

Proliferating such categories -- which is what various Democratic attempts to ''target'' a capital gains break would do -- is simply an invitation to more shelter malarkey.

The only good reason for a tax break now is simply to give a deserved break to the middle class. In a democracy, the fact that this is politically appealing need not be thought of as a fatal defect.

Either of the two frankly middle-class breaks on the table, a Social Security cut and a family credit, will suffice. If your hope is to affect job-creation, the Social Security cut is more appealing, since the payroll tax is a direct tax on jobs. On the other hand, families are in political fashion, and the value of family exemptions has badly eroded.

As for column two -- method of payment -- simply adding to the deficit is wrong. Hoping to pay for a tax cut by slicing defense is suspect, since everyone knows that defense will have to be cut more than currently planned just to meet current budget targets. And if there is a real peace dividend, either reducing the deficit or spending it on needed government investment might seem a more responsible course. So that logic dictates going for a tax increase on the wealthy.

But there we go, falling into the responsibility trap ourselves. True irresponsibility would be enacting a tax cut that wasn't paid for. Paying for it with revenue from genuine spending cuts that might otherwise be put to a wiser use barely nudges the irresponsibility meter, compared with what Republicans have done during the past decade.

Once every ten or twelve years, surely, the Democrats are entitled to indulge themselves. Agree? Write Rosty.

TRB is a column in the New Republic by Michael Kinsley.

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