Finding a way to make any tax cut meaningful

Competing proposals: If there is to be tax reduction, it should produce the greatest economic benefit.

July 23, 1999

CONGRESSIONAL Republicans are struggling to pass a tax cut the economy doesn't need and taxpayers are not clamoring for. With President Clinton also proposing a $250-billion targeted cut, it's clear these proposals are nothing more than the candy politicians love to pass out before elections.

The assumption underlying these proposals is that the federal government will realize a $3 trillion surplus over the next decade. While the economy has been performing extremely well for the past nine years, it is presumptuous to assume that the current recovery will last another 10 years.

Moreover, when faced with the large surpluses, Congress has shown very little willingness to confine itself to the 1997 spending caps. Last year, it authorized $22 billion in "emergency" spending above its self-imposed limits.

The House GOP has closed ranks behind a 10-year, $792-billion plan that features across-board-tax cuts, reduction in capital gains rates and eventual elimination of the inheritance tax. Senate Republicans are pushing a version that includes a package of retirement savings incentives and allows for increased contributions to tax-deferred individual retirement accounts. Not to be left out, the administration weighed in with targeted breaks for taxpayers who buy long-term health coverage and school construction bonds.

Using the surplus to reduce the current national debt or ensure the financial health of programs such as Medicare and Social Security makes more economic sense than cutting taxes. But if Congress feels compelled to reduce taxes, it should do it in a way that produces the greatest economic benefit.

The House's across-the-board tax cut would stimulate an economy already close to overheating, perhaps prompting an increase in interest rates to dampen any possibility of re-igniting inflation.

The Senate bill at least has the virtue of encouraging saving, which continues to lag. Not only do individuals realize better returns in tax-deferred accounts but the accounts assist in capital formation. More investment capital means increased national productivity, better jobs and, ultimately, more real income. If we must cut taxes, that approach to cutting taxes makes the most sense.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.