Newspaper article THE JOURNAL RECORD

Tax Cut Light in Comparison

Newspaper article THE JOURNAL RECORD

Tax Cut Light in Comparison

Article excerpt

WASHINGTON -- President Clinton and Republican leaders are praising themselves for the biggest tax reduction since Ronald Reagan. But comparing the 1981 tax cuts with the 1997 version is like comparing a hurricane to a summer breeze, both in size and likely impact on the economy.

The tax relief promised this time around -- $94 billion in the first five years -- comes to about one-tenth the total of the Reagan- era tax cuts, after adjusting for inflation.

Tax relief isn't the only thing puny about the 1997 deal. Stacked up against its predecessors, it doesn't offer much in debt relief either. The 1990 deficit package passed under George Bush provided $482 billion in deficit savings, and Clinton's 1993 agreement trimmed the deficit by an additional $433 billion. By comparison, the 1997 proposal offers the prospect of $140 billion in deficit savings. While the agreement projects that the country will finally reach the promised land of budget surpluses in 2002, it might have happened more quickly with no deal at all. That's because the budget negotiators used an old Washington trick: providing the tax cuts, which inflate the deficits, more quickly than the spending reductions. "Washington works on the principle that you give the voters candy today if they promise to take the medicine tomorrow," said David Wyss, chief financial economist at DRI-McGraw Hill. That procedure leaves open the possibility that after the politically popular tax cuts go into effect, a future Congress and the next president might balk at the spending cuts required to actually hit balance in 2002. But even with their doubts, private economists generally believe the 1997 deal will turn out to be a plus, although a very modest one, for the economy. Some forecasters are predicting that it will boost economic output by about 0.1 percentage point a year. That would mean the economy might expand by 2.1 percent next year instead of 2 percent. The increase would come from the stimulative effects of the tax cuts offsetting the drag on the economy from further reductions in government spending. Many economists applaud the decision to reduce capital gains taxes, believing it will encourage more investment and thus boost U. …

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