Surplus finds Washington ready to cut taxes, if it doesn't spend it

The Outlook

January 25, 1998|By Sean Somerville

WITH Congress returning next week to forecasts of a $660 billion budget surplus in the next decade, Republican and Democratic lawmakers are talking tax cuts.

House Ways and Means Committee Chairman Bill Archer, a Texas Republican, wants to reduce the combined federal tax burden on individuals and businesses from 19.9 percent of the gross domestic product to 19 percent of GDP -- cuts that would cost $200 billion in lower revenue over a decade.

House Minority Leader Richard A. Gephardt, a Missouri Democrat, plans to introduce a tax restructuring plan that would have most people paying a 10 percent rate.

Should Congress and President Clinton cut taxes? What kind of tax-cut proposals, if any, should the nation pursue?

James E. Annable

Chief economist, First Chicago NBD, Chicago

You have to start first with the notion of how much tax cut do you want in this kind of environment. We've just come through an extraordinary period of cumulative deficits. In the early 1990s, deficits were about 4.5 percent of gross domestic product. We're probably running about balanced right now. And, going forward, it will be a surplus that is a slightly positive share of GDP.

Three things ought to be kept in mind about how we want to manage the overall surplus.

One is that we had a very substantial period of deficits. Ordinarily, you run deficits for a while and surpluses for a while. But we've left out the surpluses. So doing nothing might not be a bad idea for longer-term economic health. What you're talking about here is a trade-off between the short term and long term.

The second thing you want to keep in mind is the reason why we've made it to a surplus is that the macroeconomic performance has been surprisingly good. You really want to ask yourself how long you expect that to occur.

Finally, every reasonable set of projections shows the deficit going bad very early in the 21st century. One of the strategies is to be more modest about how you invest these surpluses.

But, because of political reasons, we're going to have a tax cut. In that case, you have to sit back and ask two types of questions: What is the best kind of tax cut and what is politically most likely as well? Forbes and company probably have it right. The flat tax is probably the best tax to promote economic growth and has the least distorting behavior.

Gary Robbins

Senior fellow, Institute for Policy Innovation, Lewisville, Texas

The No. 1 thing that has to be done is something about the alternative minimum tax for personal taxes. The corporate version was taken care of but the personal tax is just a time bomb waiting to explode. It just has to be fixed.

The original intent was to make sure everybody paid some taxes by requiring a second calculation from gross income. It eliminated deductions and added income. The way it works, state and local taxes, stock options and excess charitable deductions get added back into income.

Today, one out of every 150 taxpayers has to pay that tax. But by 2007, one out of 11 will have to pay it. It was originally intended for rich people but will ultimately affect people who earn between $50,000 and $100,000 a year. We're talking about having as many as 9 million people affected by the alternative minimum tax.

The No. 2 thing is to try to go back and fix mischief on the capital gains tax cut concerning the 18-month holding period. Tax legislation passed last year defines long-term investments as those held for 18 months, not a year as under the old law. Investors are used to gauging the risk of holding an investment for a one-year period. To eliminate the 18-month provision would cost only about $1.5 billion over 10 years.

Patrick Fleenor

Senior economist, Tax Foundation, Washington

In general, I would say, tax cuts are always a good idea. In the economy you want to have as many resources as possible in the private market. There's a balance that needs to be struck. Does the government need the money or does the private sector need it? I don't think that just because there's a surplus that government should create new programs.

The money should be given back, and Congress should have to make the argument that they want this new program and this is why we need your money.

The first thing I would do is get rid of the bias against savings and investment in the country. The flat tax, sales tax and even Gephardt's proposal are aimed at addressing that.

If they don't address the problem, we're going to have less capital in the future. What we're doing right now is spending money instead of saving it and buying equipment.

Is there going to be a tax cut? That's not going to happen. Politicians get their power by giving people things. There are strong incentives to spend the money. It's the few congressmen who are proposing a tax break.

Pub Date: 1/25/98

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