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Tax Cuts, Yes - in 1999

Republicans in Congress have spent all year trying to put together a tax cut. But they haven't been able to agree on whether, how, or how much to trim.

GOP supply-siders think a tax cut is essential for economic growth. Those who want less government see it as a way to defund a "runaway" federal bureaucracy. Deficit hawks want minimal reductions until larger issues have been solved - such as how to reform Social Security and ensure its long-term health, and how to prevent Medicare bankruptcy in the next decade. Others believe paying down the national debt should be priority No. 1.

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Then there's the problem of what kind of tax cut. Important GOP constituencies have different priorities. Business and farmers want reductions in capital-gains and estate taxes. Social and religious conservatives want to end the "marriage penalty" that forces many married couples to pay more tax than they would if single.

The more-radical House GOP wanted a $101 billion cut over five years; the more-cautious Senate, $30 billion. The House now has voted an $80 billion cut.

President Clinton tried to ward off tax cuts early in the year when he proposed saving all of the projected surplus to shore up Social Security. It was a deft, if ironic, move. Without the Social Security trust fund that the government borrows from every year, Washington is still running a deficit and will do so for several more years.

The president didn't specify how to use the surplus for Social Security. But since much of the national debt is actually owed to Social Security, running surpluses in effect reduces the debt and helps the trust fund. That's why the Monitor has long urged the debt reduction solution. In essence it trims the heavy load of interest payment hanging over each year's budget.

The House vote to cut taxes $80 billion over five years would use about 10 percent of the surplus while devoting the other 90 percent to Social Security. The bill would reduce the marriage penalty by making the standard deduction for a married couple twice that of a single person. It would also accelerate the exemptions from estate taxes passed last year, and allow self-employed people to deduct all their health-insurance costs beginning next year. In a move to bolster the suffering farm economy, it would permanently allow farmers' to use income-averaging in figuring their taxes.

While many of the proposals make sense, the "marriage-penalty" provisions need revision. The tax code works mostly against two-income couples, while paying a "marriage bonus" to many other families. The House bill would grant relief to many families paying no penalty. That's unnecessary.

The White House, Hill Democrats, and AFL-CIO have already trotted out predictable language in opposition to the proposal. "Republicans are choosing to raid the Social Security trust fund to pay for an $80 billion tax cut," says Senate minority leader Tom Daschle. Mr. Clinton threatens a veto.

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Republicans rightly point out that there's a double standard here: It's OK for Clinton and the Democrats to propose spending $20 billion of the coming surplus for "emergencies," but when the GOP suggests returning some of it to taxpayers, that's a "threat" to Social Security. The main threat to the pension program has been in waiting too long to tackle its coming imbalance.

The desire to cut taxes is understandable. Net average income taxes are at their highest level since shortly after World War II. Budget surpluses over the next decade come from increased income tax collections, not workers' Social Security taxes. Clearly, $80 billion over five years won't seriously harm the trust fund if the other 90 percent of surpluses isn't raided.

But it would be prudent to hold off a year. As Fed Chairman Alan Greenspan says, it's important to stick to the bipartisan budget discipline that requires new spending or tax cuts to be offset either by reducing spending elsewhere or by raising taxes.

And, rhetoric aside, the budget surpluses projected for the next few years are made up of Social Security trust funds. The long-term challenge posed by entitlement spending is serious. Currently the national debt is about 45 percent of annual economic output. If Social Security and Medicare are not reformed, the Congressional Budget Office projects that somewhere between 2032 and 2048 the debt will reach 100 percent of economic output as the two entitlement programs eat up the federal budget. The nation must attack the problem now, before the tidal wave of retiring baby boomers hits.

Instead of a piecemeal measure this year, the next Congress should hammer together a more comprehensive package that includes the interconnected issues of reforming the tax code, Medicare, and Social Security.

Feeling the heat in an election year, Democrats have worked up their own $25 billion tax-cut proposal and identified spending trims to pay for it. Tax relief that is paid for is preferable to tax relief that is not, but the politics of the issue work against the Democratic plan: Republicans will be loath to give Democrats credit for cuts just weeks before congressional elections.

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