Parties Trumpet Tax Cuts to Woo The Middle Class

THE tax-cutting race is starting, with politicians from both parties lining up to offer Americans relief from their yearly payments to Uncle Sam.

Clutching their copies of ``Contract With America,'' GOP lawmakers promise that easing the tax burden for businesses and families will top their agenda when they officially begin work next month. (GOP plan to assist families, Page 2).

Democrats, still smarting from a stinging loss on Capitol Hill and worried about wooing the electorate in 1996, are rushing to draft their own rebates for the middle class and credits for employers.

This week President Clinton gave his strongest hint yet that he intends to propose a tax cut for middle-income families - provided it can be paid for. He is also considering ways to compensate employers willing to train wage earners who have suffered long-term declines in skills and incomes.

But as partisans busily tweak their tax-rate plans, critics question just how realistic this all is. The federal government, saddled with a burgeoning deficit, can hardly afford to cut revenues. Or can it?

Commerce Secretary Ron Brown, expected to be tapped to run the president's 1996 reelection campaign, says the Democrats won't try to ``out Republican the Republicans'' on taxes. But, he adds, ``too many Americans have not felt [the nation's] economic revival.''

Democrats blast the Republicans for billing their tax plan as a no-cost proposition.

``History has shown that promises to simultaneously cut taxes, strengthen defense, and balance the budget simply do not add up,'' says outgoing House Budget Committee chairman Martin Sabo (D) of Minnesota. ``Enacting the Republican agenda would require dismantling the budget discipline put in place last year, just as these policies are bearing fruit.''

White House Budget forecasters estimate the five-year bill for the GOP proposals will amount to $300 billion. To tax and spend according to its plan, they caution, the GOP will have to either ditch the hard-won deficit reduction agreement, or make up revenue elsewhere and slash expenditures.

Many Contract boosters insist the tax cuts will pay for themselves, especially the breaks for investors and corporations that are designed to generate more economic activity. Sounding a familiar argument of the 1980s, incoming House Budget Committee chairman John Kasich (R) of Ohio says tax cuts increase incomes, which lead to more consumption and greater investment.

A senior US Treasury official scoffs at the notion that this ``Reagan redux'' can work. He calls it a short-term grab for votes in the next elections with perilous long-term effects - bigger budget deficits coupled with higher interest rates.

Others, such as Robert O'Neill, executive vice president of Tucker Anthony, Inc. a Boston-based brokerage firm, say the GOP's major tax breaks will mean a more robust economy. The proposed reduction in the capital-gains tax rate - from 28 percent to 14 percent - not only promises a more active stock market, Mr. O'Neill says, it also will impact average Americans who, for example, have capital gains when they sell their homes. ``That money just doesn't go into the mattress. It goes to work somewhere - as an investment.''

On the $500-per-child tax credit, the centerpiece of the Contract With America's American Dream Restoration Act, O'Neill expects ``that money will become disposable income'' and spur consumers to spend. The GOP's favored increases in business depreciation write-offs, he adds, help earnings, which enables firms to invest and expand.

House Speaker-elect Newt Gingrich (R) of Georgia said last week that he's not concerned about the administration's counter to the Contract's tax policy: ``They are so stunned by the defeat - [Clinton's] genuinely wrestling with what the reaction ought to be.'' Mr. Gingrich is happy to fill the vacuum: ``There is a core distinction about which direction you want America to go in - lower taxes, greater incentives for investment and savings and work ... or higher taxes and more government spending.''

Strategists at the Democratic Leadership Council, the party's think tank, seem intent on blurring that distinction. Restoring ``the American dream for average working families'' is the administration's essential first step toward ``the new center of American politics,'' and that means substantially lower taxes for the middle class - a measure only possible by ``ruthlessly cutting unproductive federal spending,'' the DLC said in a post-election analysis.

If that language sounds similar to GOP rhetoric, it's because Democrats now insist that anything less will guarantee a one-term Clinton presidency.

With all the hand-wringing among Democrats, some express confidence that Republicans have laid out too ambitious a track - costly tax cuts and a balanced budget. But the Clinton administration's own plans - including the welfare reform and job training and education program it plans in 1995 - will be moribund unless the White House takes a harder look at how government currently taxes and spends.