A Tax Cut for Those Who Need It

The Washington Post


The economy is slowing, yet the surplus keeps growing. President-elect W. wants to use both to justify a big tax cut. How should the Democrats respond? (A) Warn once again that a big tax cut will jeopardize Social Security and that a better use for the surplus is to pay down the nation's debt. (B) Reject any fiscal stimulus and trust Alan Greenspan alone to achieve a "soft landing." (C) Agree with Bush that a fiscal stimulus would be useful and appropriate, but argue that it should take the form of new spending on education, health care, child care and public transit rather than a tax cut. (D) Concur with Bush that a tax cut is appropriate but demand that it favor poor and working families instead of the rich.

Answer: (D).


Bush doesn't have a prayer of getting his touted $1.3 trillion tax cut through the next Congress, of course. Not even the Republican leadership is in favor. But unless Democrats counterpunch with one of the above, the betting is that a good-sized tax cut will be rolled into the 2001 reconciliation bill that goes to his desk within the year.

Which carries the biggest punch? For the past 18 months, Clinton and Gore have relied on (A). But (A) won't wash if the economy keeps slowing and the surplus keeps growing.

Most economists and conventional opinion leaders will favor a combination of items (A) and (B). But there's no particular virtue in eliminating the national debt. This is especially true when the economy is heading south.

Nor does it make sense to place complete responsibility on Alan Greenspan and the Fed to keep the economy running full tilt. Monetary policy is potent all right, but not nearly as potent as when combined with fiscal policy. And who's to say Greenspan and company will always properly balance the nation's interest in more jobs with its interest in checking inflation? The six rate increases since June of 1999 do not inspire confidence.

If the new Republican White House wants to revive fiscal policy, more power to it. Democrats shouldn't be the ones ceding control of the economy to 12 bankers who, by training and inclination, err on the side of preempting inflation rather than increasing employment.

So the real choice for Democrats comes down to (C) or (D). Admittedly, (C) is tempting. Bill Clinton never came close to the "investment budget" in education, child care and health care he campaigned on in 1992. In fact, as a percentage of the federal budget and as a share of gross domestic product, federal spending on these worthy objectives is lower than when Bush's father was in the White House. And despite the booming '90s, the rate of child poverty hasn't diminished, health care is less affordable to more Americans, and schools in poor and blue-collar communities are worse. For the long run, we need more public outlay.

So why not (C)? Two reasons -- one economic and one political. First, as important as it is to increase public investment, it's not an ideal way to stimulate the economy, because it takes too long -- far longer than a tax cut, the mere anticipation of which can spur personal spending.

Second, the public doesn't trust government to quickly spend a lot of extra money and to do so wisely. Public skepticism in this regard is not unjustified. If it's posed as a choice between cutting taxes and spending a lot more public revenue, Republicans win hands down.

So we're left with (D), and here's what Democrats should be saying loud and clear: We hear you, W., and we agree that a tax cut may be warranted next year. But not the kind you're proposing. We want a tax cut that primarily benefits poor and working families. The families we care about haven't gotten anything out of this long economic recovery, while the families you care about have made out like bandits. Besides, a tax cut to our families is a more effective spur to the economy than a cut to yours, because our families will spend more of every dollar they get back.

So here's our plan: First, expand the earned-income tax credit by enough to provide an additional $1,800 of income for a working family at the bottom. Second, eliminate all payroll taxes on the first $7,000 of personal income. (Most lower-income taxpayers pay more in payroll taxes than they do in federal income taxes.)

Bottom line: Almost every penny of our total tax cut for next year would go to families in the bottom 40 percent of income. This is in contrast to your tax cut, Mr. President-elect, which almost entirely benefits families in the top 5 percent. We can sell ours to the American people better than you can sell yours. In fact, ours may well win back Congress for the Democrats.

You may also like