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Clinton's Targets For Higher Taxes Gird for Battle

Critics say tax increases will stall recovery and prevent creation of promised jobs

REACTION to President Clinton's call for the biggest tax increase in history has almost drowned out his pledges to create more jobs and to slash the federal deficit.

For a week, economists and entrepreneurs have loudly voiced their concerns that added burdens for consumers and businesses could thwart what is finally shaping up to be a recovery from a protracted recession.

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They worry that Mr. Clinton's bid to raise taxes and spend more in the short term, and hazy plans to reduce government outlays in the long term, will mean slower growth and more layoffs.

"There's no recovery worth its salt that doesn't put the American people back to work," Clinton said in his Feb. 17 address to the joint session of Congress. To convince Americans of the need for a federally funded jobs and public-works package, he has downplayed recent Commerce Department data which show a surge in economic growth - the most marked gains in years.

Countering Republican charges that a stimulus package is ill-timed for an economy now expanding, Senate majority leader George Mitchell (D) of Maine, House majority leader Richard Gephardt (D) of Missouri, and House Speaker Thomas Foley (D) of Washington supported the plan. House minority leader Robert Michel (R) of Illinois told reporters at a Monitor breakfast Feb. 19 that he expects the plan to pass Capitol Hill's muster largely intact.

While public opinion in favor of the president's call to action has been running high, veteran Republican pollster Vincent Breglio says he expects the hoped-for Democratic consensus on Clinton's complex program will crumble.

The debate's outcome will in part depend on how effective the principal targets of higher income taxes - well-off individuals and corporations whose stock is traded on Wall Street - are in conveying their position.

By asking the most successful portion of the private sector to incur higher costs, they say, Clinton is dampening prospects for the increased hiring, added investments, and other contributors to economic growth he seeks. Many lash out at Clinton's calls for "tax fairness" as a veiled attempt to redistribute income.

In the just-released book "Growth With Equity: Economic Policymaking for the Next Century," several Brookings Institution economists examine the link between income inequality and economic growth. Mandates on private employers to assume costs for training employees, for example, they say must be accompanied by federal policies that do far more to "support and nurture innovation in the private sector," such as liability reforms and favorable tax changes.

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Detractors say Clinton's plan lacks this balance. "The private sector will be asked to raise its `contribution' to the federal government by some $250 billion over the next five years," says Gary Robbins, president of Fiscal Associates and former chief of the Treasury Department's applied econometrics staff.

While this represents a 5 percent boost in revenues, he says, the negative impact on savings and investment will be much larger. "The Clinton administration recognizes that incentives matter, by seeking a targeted investment credit. Yet, an increase in the corporate tax rate will more than wipe out the credit."

Rep. Lamar Smith (R) of Texas held up charts on the House floor last week that recorded government spending at $230 billion in 1972, and $1.4 trillion today. While federal revenues have increased by more than 400 percent in the past 20 years, expenditures have soared by almost 500 percent. "However much we have increased taxes, we have spent even more," he says.

Conservative Washington think tanks like the Heritage Foundation, where many former Bush administration officials now critique Clinton's moves, assail the White House plan as a path that "will lead to higher [federal] spending," and "a deterioration in the economy's performance."

A 1991 Joint Economic Committee survey of tax increases from 1947 to 1990 asserts that every dollar in added taxes led to $1.59 in more government spending. According to Heritage Foundation estimates for the past three years, federal outlays increased $1.91 for every additional dollar collected in taxes.

And in the private sector, William Dunkelberg, chief economist for the 500,000-member National Federation of Independent Businesses, concluded in a study released during the recession, that every 1 percent hike in the federal tax burden cuts economic growth by 1.8 percent and reduces overall employment by 1.14 percent.

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