Magazine article Insight on the News

Budget Deal Makes Tax Cuts Mere Tax Shifts

Magazine article Insight on the News

Budget Deal Makes Tax Cuts Mere Tax Shifts

Article excerpt

The rules created by the 1990 budget deal presented a dilemma for President Clinton as he wrote this year's budget. He had promised tax cuts, but new federal budget rules require that all tax cuts be paid for -- no more cutting taxes today and promising to cut spending later. Further, tax cuts must be paid for either through cuts in entitlement spending or other tax increases; discretionary spending can't be used.

The president resolved his quandary in a predictable way. Instead of paying for his $98 billion in tax cuts through trimming the nation's exploding entitlement programs, he mostly pays for tax cuts through other tax increases.

But by using other tax increases to fund his tax cuts, Clinton makes two economic mistakes. First, while some taxes have more of an adverse impact on the economy than others, all hurt growth.

Further, the taxes that Clinton proposes to increase are among the more damaging of taxes -- those affecting investment. If there is anything that the United States needs, it is more savings and investment. During the last 15 years, our savings rate has been 6.4 percent -- which is at the low end of industrialized countries.

The tax increases mainly are technical and collected at the corporate level. Among the tax hikes Clinton proposes are requiring citizens taking a capital gain to use an average-cost method and scaling back the ability of corporations to take the dividends-received deduction.

Clinton's proposal should not even be a starting point for Congress. Instead they should craft their own tax and-budget plan from scratch. As they develop their plan, Congress should keep several key principles in mind.

First, Congress shouldn't use tax increases to pay for tax cuts. Playing semantic games with the American public is one reason for heightened cynicism about Washington. If Congress and the president are promising the American public a tax cut, make it a net tax cut -- not simply a tax shift.

And when Congress is cutting taxes, if anything, it should first reduce the tax burden on work and investment. While class warriors such as House Minority Leader Dick Gephardt of Missouri will object, tax relief must be focused on lowering top marginal rates and reducing the burden on investment. …

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