The $792 Billion Tax Cut Is Not Enough

Question: Do you think the federal government is more careful with money and makes wiser spending decisions than you do? That is the real issue regarding the bill that Congress has passed that would cut taxes $792 billion over 10 years.

President Clinton pushed through a huge tax increase in 1993 entirely on the argument that it was needed to deal with the budget deficit. Now, with surpluses in view as far as the eye can see, the president argues that the tax cut – which is smaller than his tax increase – is too large. He thinks government, not the people who pay taxes, should keep the money, and says he will veto the measure when it reaches his desk. In fact, his chief of staff, John Podesta, has described the president as eager to veto the bill. Clinton has said about $300 billion over 10 years is as far as he will go.

The tax cut has as much to do with reining in government as it does with reducing taxes – and maybe more. As government grows, government intrusion grows with it and individual freedom declines. The major criticism of the tax cut should be that $792 billion is not nearly enough. If Washington has the money, it will spend it. It's as simple as that. If you doubt it, bear in mind that Congress and the president made noises last year about sticking to spending limits and preserving the budget surplus – and then, with straight faces, voted away $20 billion of it in "emergency" spending. And they're preparing to do the same thing again this year.

The president describes the proposed tax cut as "huge," but it averages 0.6% of gross domestic product over the next 10 years. By comparison, the 1993 tax increase averaged 0.7% of GDP. Since 1992 taxes have grown by 58% while the GDP was increasing only 36%. Right now, the federal government takes more than one of every five dollars produced by our economy. That's before state and local governments take theirs. Even with the $792 billion taken out, the federal government will still take more than one of every five dollars produced.

A new analysis by Bruce Bartlett, a Senior Fellow at the National Center for Policy Analysis and a former Treasury Department official, puts the tax cut into some perspective. Bartlett points out that because it phases in over 10 years, it won't affect revenue significantly until 2002. He calculates that it will be at least 2003 before the 1999 tax cut combined with the one enacted in 1997 will offset the impact of the 1993 tax increase.

Bartlett says Congress would have to cut taxes by $3.4 trillion for the 1999-2009 period to get federal revenues back to the same percentage of GDP they were when Clinton took office. At $792 billion, the tax cut does not even match the projected growth in federal taxes during that same decade. And the tax cut leaves alone all the excess revenue from Social Security taxes.

The biggest single item in the tax bill is an across-the-board reduction of income tax rates by one percentage point; that is, the tax rate drops from 15% to 14% in the lowest bracket and from 39.6% to 38.6% in the highest. The bill also eases the marriage penalty on many two-income couples, phases out the estate tax and the alternative minimum tax, indexes capital gains to account for inflation and increases allowable contributions to individual retirement accounts.

One objection the Clinton administration keeps trumpeting is that higher-income people would get more tax savings from reducing the tax rates by one percentage point than lower-income people. But you have to pay taxes to benefit from a tax cut. Taxpayers would receive tax cuts roughly in proportion to the taxes they pay, and 48 million of the nation's 134 million tax filers didn't pay any income tax last year. Among those who do pay taxes, the one percentage point reduction means taxpayers in the 15% bracket get a 7% reduction and those in the top bracket get a 2.5% reduction.

Spending caps, lock boxes or any other gimmick notwithstanding, if Washington gets the money, Washington will spend it. Just as one would not give more booze to an alcoholic, the money supply to Washington needs to be reduced…and reduced…and reduced. Reducing it by $792 billion over 10 years is not nearly enough.



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.