February 17, 1997 05:41 PM | | Bookmark and Share

From The Nation, February 17, 1997


If anything resurrected Bill Clinton after the 1994 elections and kept him in the White House past 1996, it was his joining with congressional Democrats in criticizing GOP plans to slash Medicare in order to pay for “a big tax cut for the rich.” The charge had resonance because it was pretty much true. That is, Republicans did propose a package that would have sharply reduced Medicare spending compared to projected outlays under current law. And they coupled their Medicare reductions with a large tax cut of roughly equal dollar magnitude.

But why was that tax cut characterized–correctly–as “for the rich”? Certainly, the most talked about item, the $500-per-child tax credit, hardly deserved that epithet. Stupid? Pandering? A reckless squandering of scarce public resources? Maybe. But the child credit was not primarily “for the rich.” Eighty percent of its tax reductions were for families making less than $75,000. Indeed, Democrats, led by President Clinton, had a similar child-credit proposal–albeit one with a lower age cut-off and with phase-outs that denied any benefit at all to better-off families.

No, the real GOP “tax cut for the rich” was the proposed halving of the capital gains tax. Almost three-quarters of this hugely expensive tax cut was targeted to families making more than $100,000 (with the lion’s share of that going to those making $200,000 or more).

Senate Republicans have reintroduced their capital gains tax cut plan, as the $237 billion centerpiece of a $615 billion tax cut proposal (over 10 years) that also includes expanded IRAs for upper-income people, sharp cuts in estate taxes on very large inheritances and, last and least, a $500-per-child tax credit.

Presumably, the President is still squeamish about what he called “a big tax cut for people who don’t need it.” So why has he been dropping hints left and right over the past few weeks that he “can envision being more flexible on capital gains,” and adding “I’ve never been philosophically opposed, as some of my fellow Democrats are”?

Does the President simply fail to understand that the Republicans’ capital gains tax cut is an abatement for the rich? If so, there are plenty of people in his Treasury Department who can set him straight. A more likely source of the President’s wavering on capital gains, however, is that he hates to be “philosophically opposed” to much of anything that anyone really wants. He feels the pain of wealthy stock traders, just as he empathizes with the poor and downtrodden. But he’s also smart enough to understand that programs he cares about a lot more than capital gains tax cuts are in danger if the government doesn’t have the revenues to pay for them.

Nevertheless, the President has recently held out the possibility that he might give the Republicans their cherished capital gains tax cut if they’ll support his Dick-Morris-inspired college tuition tax subsidies. That’s a pretty odd bargain. The tuition deduction plan, which offers to pay 15 percent of the tuition bills of families making up to about $50,000 and 28 percent for better-off families (making up to a little over $100,000 a year), looks exactly like the kind of upside-down subsidy that Republicans generally tend to love–and that if, say, George Bush had proposed it, Democrats would deplore. Talk about a lose-lose deal from the point of view of good policy. Win-win would be if the parties agreed to drop both plans.

Of course, Clinton may think he can scheme with congressional Republicans to jigger the revenue estimates on the capital gains tax cut to make it look much smaller than it really is. Already, the congressional Joint Committee on Taxation has optimistically pegged the cost of the Senate capital gains tax cut at only about half its likely loss–albeit a still hefty $129 billion over ten years. If assumptions about increased asset sales are made even more rosy, phase-ins are adjusted and everything past the first five years is ignored, then the apparent cost of a capital gains tax cut can be made to appear quite small in the short run. But cooking the books can only affect short-term perception. It won’t affect the huge negative impact that a capital gains tax cut will have on both long-term revenues and tax fairness.

Bill Clinton may not care about squandering one of the only issues that’s worked for Democrats over the past two years, but he does profess to believe in the value of government programs and has been talking a lot lately about his place in history.

So he should keep in mind that even under current law, the federal government is scheduled to go to hell in a handbasket. Spending on so-called “discretionary programs”–everything from defense, to environmental protection to roads–is already slated to fall by a quarter, as a share of the economy, by fiscal 2002. Current congressional sentiment to avoid further defense cuts is likely to mean that the rest of core government will have to be squeezed even more. Add big tax cuts on top of all this, and Bill Clinton won’t leave much government behind to his successors. That’s hardly Mount Rushmore material.

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