GOP set to push tax cuts in House

November 18, 1994|By Carl M. Cannon | Carl M. Cannon,Washington Bureau of the Sun

WASHINGTON -- More than 200 years after the Boston Tea Party, the Republican Party is attempting to prove that taxes can still fuel a revolution.

As they prepare to convene as the new majority, House Republicans are poised to pass a package of tax cuts calculated to lessen the tax burdens of most Americans, from the working poor to the idle rich -- and almost everyone in between.

Even Senate Republicans seemed to be caught unawares by the passion in the House for tax cuts.

At the White House, officials say they don't know how the president will respond because they don't know precisely what taxes the Republicans will try to cut -- or which existing programs they will target in order to pay for them.

It shouldn't be any secret. For two years running, Rep. John R. Kasich, the top Republican on the House Budget Committee, has sent the GOP blueprint to the White House.

Now, with the Republicans about to become a majority in the House, Mr. Kasich will be taking over the House Budget Committee -- where he will command enough votes to ram his cuts through.

Two of the proposed tax cuts are hugely expensive, one on capital gains and another a rebate to families with children. In addition, Republicans want to end the so-called marriage penalty, expand eligibility for IRA deductions and allow homeowners to take deductions when they sell their house at a loss. They also have long-term plans to make the tax code much simpler and go after the "underground" economy.

Such sweeping proposals are already beginning to expose some of the differences inside the GOP's tent. Senate Republicans, such as incoming Budget Committee Chairman Pete V. Domenici of New Mexico, has already said he is chary of anything that would add to the deficit.

By contrast, House Speaker-to-be Newt Gingrich is talking with unrestrained glee about slashing away at taxes and spending.

The White House also seems divided. While budget director Alice M. Rivlin expressed out-and-out hostility toward the notion of tax cuts,presidential adviser Tony Coelho urged the president and his staff to be patient and simply stay out of the way of what he described as a "speeding Republican freight train."

"If they [Republicans] come out with cuts that don't make sense -- if they do it wrong -- we can pounce on it," Mr. Coelho said in an interview. "But if they do this right, there's nothing we can do about it."

Here is a more detailed look at some of the taxes in play.

* Capital gains tax: These are the taxes Americans pay when they reap profits from investments. The current top capital gains tax rate is 28 percent. Republicans insist, as an article of faith, that lowering the capital gains rate will not only spur economic activity, but also not cost the U.S. Treasury all that much.

In their "Contract with America," House Republicans proposed cutting the capital gains rate in half, to 14 percent, and indexing it for inflation. Using economic models that predict this cut would spur growth, they estimate it will cost the U.S. Treasury some $56 billion over five years.

Democrats, who routinely characterize this proposed change as a tax break for the wealthy, insist the cost would be much higher.

* Family Tax: This proposal, also in the GOP "Contract," is to give a $500 per child tax break to every family with an income below $200,000 a year.

This idea has been proposed over the years by those from one end of the political spectrum to the other, including President Jimmy Carter.

But even conservatives don't justify it on economic grounds.

"It's expensive and as a supply sider, there's no positive side economically," says Stephen Moore, an economist with the Cato Institute and a former Republican aide on Capitol Hill. "Republicans argue that it's good social policy."

It's also good politics, admits Rob Shapiro, an economist with the Progressive Policy Institute. He and other Democrats concede that as the momentum builds for this tax cut, it will be hard to stop.

* Flat tax: The new champion of this concept is Republican Rep. Dick Armey, expected to become the new House Majority Leader. He has in mind a 10-line tax form that takes less than five minutes to complete, simplifies the tax code and requires Americans to pay less in total income taxes. It grants no deductions, except for a large individual or family deduction, and would mean those making less than $35,000 a year would pay no income taxes.

Politically, it's a lightning rod because it does away with the home mortgage deduction and charitable deductions. President Ronald Reagan considered it when he ran for president in 1976, but rejected it when he concluded that he would get too much political heat.

Even its sponsors concede it would probably only work if coupled with another idea that Republicans call a long-term project -- the consumption tax.

* Consumption tax: Championed by incoming House Ways and Means Committee Chairman Bill Archer of Texas, this is called a "value added tax" by economists and a "national sales tax" by ordinary people. It's common elsewhere in the world.

Generally, liberals consider this idea highly regressive -- it falls too heavily on the poor and working class. Conservatives are skeptical for another reason: Because the tax is hidden, it can be raised too easily and ultimately become a drag on the economy.

Senate moderates of both parties have an idea they believe is better: A consumption-based income tax that will allow taxpayers to deduct any money they save.

Whatever is decided, most observers believe change is coming -- and coming soon. Says Kenneth Hagerty, a longtime proponent of capital gains reform: "The voters have spoken."

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