July 19, 1999

There's something about Republicans and tax cuts.

In 1993, much to the fury of conservatives, President Clinton raised the top marginal income-tax rates. The editorial pages of the Wall Street Journal fairly bristled with wrathful indignation. Predictions of imminent doom abounded. Hitherto hard-working Americans, waxed the apoplectic critics, would work less, earn less and save less. The budget deficit would explode, the dollar would depreciate, the stock market--Good God, the stock market!--would go into free fall.

Well, things didn't quite turn out that way, of course. The American economy did spectacularly well, household incomes rose appreciably, the budget deficit evaporated, and the stock market went through the roof.

But, still, conservatives chafe under Clinton's tax hikes. Every now and then, they contrive to introduce the issue anew into public debate. And almost always, they end up with egg on their faces.

During the 1996 election season, there was Steve Forbes touting his flat tax which, for all the hoopla surrounding it, amounted to but a mere curiosity. On his heels followed Bob Dole who, in the dying days of his doomed campaign, promised to cut taxes by 15 percent--a laughably transparent maneuver that the American public treated with deserving contempt.

Their heads bloodied but unbowed by the bludgeonings of the American electorate, the tax cutters are back. Sporting a bulldog tenacity that must elicit grudging admiration from even their harshest foes, conservatives in the House and Senate have introduced a slew of tax cut proposals in recent weeks.

They think the conditions are propitious this time. Their optimism rests on the emergence of budget surpluses in Washington. As the U.S. economic juggernaut rolls along, seemingly unstoppably, the government finds itself flush with tax revenues. The creation of millions of new jobs has resulted in massive income-tax receipts (and smaller expenditures on welfare) while the dizzying ascent of the stock market has generated substantial capital-gains tax bills. And thus, the once-feared budget deficit has been transformed for the foreseeable future into a string of progressively-larger budget surpluses.

Clinton, with his eye fixed firmly on his legacy, has pronounced himself keen on "saving" Social Security and Medicare. This essentially requires the budget surplus be used to retire existing debt. But this is a tame use of the surplus. Clinton's fellow Democrats, though hardly averse to the importunings of the senior citizen lobby, are reluctant to see the entire surplus used for this purpose. They would like to see some of the surplus spent on other pet causes such as education and health--and have apparently persuaded Clinton of the wisdom of their ideas.

The Republicans, too, know precisely what to do with the budget surplus. They are itching to gift their rich benefactors with a bouquet of tax cuts. They would like to, among other things, reduce the marginal income-tax rates, cut capital gains taxes, and slash estate taxes. (In an insidious attempt to portray estate taxes as particularly malicious and ubiquitous, Republicans refer to them as death taxes, conveniently overlooking the fact that most Americans will never pay the "death" tax.)

Having learned their bitter lessons from the battles of yesteryears, the conservatives have carefully couched their current proposals as tax cuts for all. One idea making the rounds calls for cutting not just the top tax rates by 10%, but all of them by that amount.

Gasp! How generous--until one considers that the taxpayer in the 15% tax bracket would see his rate fall to 13.5%, while a taxpayer in the highest tax bracket would see a reduction in all the various tax rates up to and including the 39.6% tax rate. Tax cuts for all, indeed.

While the Republicans forge ahead with their tax cuts, and Clinton and the Democrats seek to bolster their favored spending programs, an important question seems to have gone unasked: At a time when unemployment is low and the economy is growing robustly, is it sound policy to cut taxes and raise government spending? Economic theory suggests it is not. Far better, perhaps, to do the unglamorous thing with the surplus--viz., pay off the national debt.

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