Tax Cuts, Still Alive Jude Wanniski July 24, 1998

The front-page story in today’s New York Times by Dick Stevenson is accurate when read from first to last, but misleading in its headline implication that Senate Republicans have decided not to push for tax cuts this year. They simply have decided not to push for BIG tax cuts, which were never in the cards anyway. The foundation has not been laid for one --  as the giant surpluses now being projected were not on the horizon at the last national elections -- so there is no mandate. What we expected is a 15% capital gains tax, from 20%, because it would “pay for itself” as it is scored by the CBO. This would be accompanied by a cut in the payroll tax that would reflect the surplus being projected in Social Security over the next five years. This would not have to be “paid for” if the funds were instead diverted into an expanded Roth IRA. If the Congress were to begin adding major tax cuts atop this no-cost package, it would need to confront the President’s demand that there be no tax cuts until Social Security is fixed. If they try for too much, Senate Republicans are correct in seeing no tax cuts at all at the end of the day -- and a political standoff with the Democrats on Election Day.

The NYTimes story today does discuss a “small” tax-cut package of $70 billion over five years, as still being possible. It certainly could be a bit bigger than that, considering the consensus between the Congress and administration that the surplus will be $1.55 trillion over ten years (CBO) or $1.8 trillion over ten (OMB). The Republican fly in the ointment is Chairman John Kasich of the House Budget Committee, the gee-whiz kid. Kasich is insisting on a huge comprehensive tax cutting program that chews up $700 billion of the projected surplus, the rest going to national debt reduction to satisfy Rep. Mark Neumann’s [R-WI] Herbert Hoover fan club. The relevant Senate players -- Chairman Bill Roth of Senate Finance, Chairman Pete Domenici of Senate Budget, and Sen. Phil Gramm [R-TX] -- will not go for a $700 billion tax cut and they will not join the Hoover fan club to pay down debt, knowing that does nothing to fix Social Security. Unless Kasich can be restrained, there would be no way to bridge the gap in Congress.

The good news is that Speaker Newt Gingrich has gotten behind the idea of using the $530 billion Social Security surplus to begin fixing the system, in a way the President could and should accept. It is, after all, a variation on the payroll tax diversions of Roth, Domenici and Gramm. And so far Newt is neutral on the size of the tax cuts, which means he could easily find a number that the Senate chiefs will buy and that will accommodate the President’s team. Jack Kemp, who has been pushing and shoving behind the scenes to keep the tax cuts alive, issued a statement of support for Gingrich late Thursday. He said in part: “The beauty of the idea is that because the payroll-tax surplus is not needed in the near future to pay benefits, the Speaker’s proposal would give current workers the ability to pre-pay part of their retirement and in the process reduce the burden they will place on Social Security when they retire. The President should throw his full weight behind this visionary idea -- which accomplishes exactly what the President has said he wants.” Kemp naturally would like a trillion-dollar tax cut, but is urging Kasich to follow the Senate lead in devising the best possible package that the President will practically have to sign. If this line is followed, the congressional Democrats will weigh in with tax cuts of their own, which could lead to a bipartisan bill-signing in an October Rose Garden.