Step-by-Step Tax Cutting

The main reason there wasn't more public enthusiasm about the $792 billion tax cut bill that Congress passed and President Clinton vetoed seems to be that people really didn't understand what was in it.

The Republicans, who managed to pass the bill, tried with only limited success to explain. However, the legislation was complex, touching on a host of inequities in the current tax code.

Further, opponents of the tax cut managed to keep proponents on the defensive, and they had a powerful spokesman in the president, who kept describing it as "gargantuan" and "huge." Never mind that the tax cut was smaller than Clinton's 1993 tax increase. As this president is wont to do, he concentrated on appeals to emotion instead of reason.

I don't know what Congress is going to do now, but I do know what it should do.

It should take the parts of the tax cut bill that are likely to draw the most public support, and pass those parts as a series of separate bills. Send them to the White House, one by one, and see whether Clinton will veto marriage penalty relief. Or abolishing the death tax. Or relieving middle-income taxpayers of the threat of the alternative minimum tax. Or enlarging the amount people can put into Individual Retirement Accounts.

As each piece of legislation hits the president's desk, if he signs it, taxpayers benefit; if he vetoes it, Republicans have another campaign issue.

About 25 million couples pay higher taxes simply because they're married. The original bill would have widened the 15% tax bracket and increasing the standard deduction for married people. This would reduce the penalty for three million of those couples, mainly those making between $15,000 and $30,000 a year. Does Clinton dare veto marriage penalty relief at a time when government is taking a higher share of the nation's total output than ever before in history – more than it took at the height of World War II?

Even liberal economists agree that the death tax levied on estates does nothing to equalize the distribution of wealth. Most of the very rich avoid the tax by skilled estate planning that exploits loopholes. It's the family-owned businesses and farms that have to be sold to pay estate taxes that are most often affected now. Should those enterprises have to be sold because the owners were spending what ready cash they had on building them up over the years rather than on estate planners?

The alternative minimum tax was intended to prevent people with large incomes from avoiding all taxes with various deductions. Taxpayers have to calculate their taxes twice. First they figure their taxable income and taxes on a Form 1040. Then they take the taxable income from the 1040, add back most of their deductions, and figure their taxes again, using a separate rate structure and a separate set of exemptions. They pay whichever tax amount is higher. However, the exemptions for the alternative minimum tax are not indexed for inflation, so the number of taxpayers paying that tax is forecast to grow from about 800,000 this year to more than nine million by 2009. The taxpayers most affected will be those with incomes between $50,000 and $100,000 per year.

The measure vetoed by the president would have phased out the alternative minimum tax. Will he veto a stand-alone measure that reduces taxes for more than eight million taxpayers?

Another provision of the vetoed bill would allow contributions to IRAs of $5,000 per year instead of the current $2,000. The nation's savings rate has fallen as taxes have risen – from 5.7% in 1992 to 0.5 % last year. The administration opposes increasing IRA contributions, claiming that people mainly shift assets out of taxable accounts. But there is evidence that IRAs are leading to net increases in saving. Besides, most families don't have enough liquid assets to shift for very long. Will the president veto a bill that would let them save more?

Some other provisions of the vetoed measure – indexing capital gains for inflation and extending the research and development tax credit, for example – also deserve to be passed, but probably are more difficult to explain to the general public and thus stand less chance of attracting strong support. For that matter, reducing each tax bracket by one percentage point is an excellent idea, but we can forget about that for this year.

As for the others I've mentioned, though, Congress should pass them one by one. See whether the president has the nerve to veto them in that fashion, when it's easier for taxpayers – and voters – to see exactly what he's doing.



The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.