Higher top income tax bracket among economic proposals given to president

January 30, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- President Clinton, closeted with his Cabinet officers and advisers at Camp David today, has been given a new analysis of possible tax increases and spending plans as he draws up the economic blueprint that will define his administration.

The administration asked DRI-McGraw-Hill, the Boston analytical company with one of the most respected econometric models in the nation, to assess the impact of the potential components of its master plan to stimulate growth and cut the deficit.

David Wyss, the economist who did the analysis, said a variety of proposals have been run through computers.

"I think they are using that as background, but the decisions are political more than economic," he said. "They have to decide what they can get through Congress."

Included in the DRI-McGraw-Hill analysis, completed at the request of various departments and agencies in the administration, are:

* The increase in the top income tax bracket from 31 percent to 36 percent, pledged by Mr. Clinton during the campaign. It would raise $14 billion.

* A one-year delay in the annual Social Security cost-of-living adjustment, which could save $10 billion.

* Taxing the benefits of wealthy Social Security recipients, which could raise $2 billion.

* A 10-cent-a-gallon increase in the gasoline tax, which could raise $10 billion to $15 billion.

* A major carbon tax, which could increase the cost of gasoline and fuel oil by 30 cents to 50 cents a gallon, raising $30 billion to $50 billion.

* An additional 10 percent cut in defense spending over the next four years, which would save $30 billion.

On the investment side, the administration asked DRI-McGraw-Hill to analyze an investment tax credit (ITC) that was both incremental and restricted, and a capital gains tax cut.

Tax experts advised DRI-McGraw-Hill that it would be difficult to write the tax credit in the way the administration wanted it: to target it at increased investments in new or expanding manufacturing facilities.

"You have to define what you are restricting it to," said Mr. Wyss. "Since companies have a fair amount of leeway in how they define plant, there are ways of playing games. The games are probably less important if you have a temporary ITC rather than a permanent one."

A temporary tax credit would be offered for one year or two, a deadline that would be designed to spur investment quickly in new plants. A permanent tax credit would suit the administration's plan to improve the country's overall manufacturing and technology base.

This is the sort of dilemma that Mr. Clinton and his economic team face, as they try to decide how much stimulus the economy needs and by how much they can cut the deficit --estimated by the Congressional Budget Office to hit $310 billion at the end of the 1993 fiscal year.

The request to DRI-McGraw-Hill to analyze these proposals does not necessarily mean they will be implemented. But it does indicate that they are under serious consideration as the final decisions are made on the Clinton economic program. Some of them -- such as the carbon tax and the gasoline tax -- are alternatives, so only one might be chosen.

"That's the problem. The shopping list is pretty long. It's got to be narrowed down pretty quickly," Mr. Wyss said.

Mr. Clinton is expected to stimulate the economy with a public spending package costing between $10 billion and $20 billion, well below the $60 billion urged by some liberal economists. Most of the funding could come from a gasoline tax.

Designating that money for a major highway program would make it revenue neutral (the expenses of the program would be equal to the amount gained from the tax) and more attractive to a deficit-conscious Congress.

Mr. Clinton is also looking to cut the deficit by $145 billion by fiscal 1997 through a combination of spending cuts and increased revenues.

The president will announce the broad outlines of his economic plan on Feb. 17 in an address to both houses of Congress.

One major economic indicator is due before then: next Friday's employment figure. While the economy has shown increasing signs of strength -- the gross domestic product grew at an annual rate of 3.8 percent in the final quarter of last year, the highest for 3 years -- job creation has been virtually static.

The Friday figures are expected to be positive, reflecting an increase in payrolls in January of around 100,000, including nTC 10,000 in the crucial manufacturing sector. By historic standards, however, the job creation in this recovery will remain at historic lows.

Irvin L. Kellner, chief economist with Chemical Banking, New York, said: "You would have to have a million increase in payrolls before they [the administration] would alter their plans.

"The bottom line is that while it's very laudable that corporate America is so efficient that they are able to handle seven quarters of economic growth based on productivity alone, the flip side to that is lack of job creation, which suggests this recovery could come a cropper."

One of Mr. Clinton's main concerns in stimulating the economy and creating jobs is to keep long-term interest rates down. This week, he held his first face-to-face meeting with Federal Reserve chairman Alan Greenspan for what administration officials hope will be the start of a cooperative relationship.

"The key to creating jobs is keeping interest rates down, hopefully getting them lower," said Michael Sherman, economist with Shearson Lehman Brothers, New York. "That's far more powerful than any stimulus."

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