SOME MAY CALL IT A compromise, but the agreement by congressional Republicans to seek $245 billion in tax cuts over the next seven years is a clear victory for militant tax-cutters.
Reformers in the House wanted $353 billion in tax cuts. Deficit hawks in the Senate, led by Sen. Pete Domenici, R-N.M., were willing to accept $170 billion in cuts but only after enough spending cuts were in place to balance the federal budget by 2002.Congress now has a mandate to balance the budget and find room for $245 billion in tax relief at the same time - a good trick in a city where lawmakers of both parties are famous for protecting subsidies, benefits and pork-barrel spending.
Exactly how the tax cuts will be doled out won't be known until fall, but there's general agreement that a tax credit for families with children and a reduction in the capital gains tax will be included.
Here are some thoughts on what might (or should) happen when the House Ways and Means Committee and the Senate Finance Committee take up the divisive issue of whose taxes should be cut:
- The tax credit for families with children is sure to be approved. House conservatives insist the $500-per-child credit be available to families earning as much as $200,000 a year, but that's likely to be cut back to save money and head off criticism of tax relief for the rich. Eligibility could be capped at $95,000.
- There likely will be a reduction in the capital gains tax on profits from the sale of stocks, bonds, real estate and other assets. The tax currently is 28 percent for most investors, but legislation sponsored by Sens. Joe Lieberman, D-Conn., and Orrin Hatch, R-Utah, would reduce that to 19.8 percent.
- Efforts will be made to roll back the 1994 increase in the taxation of Social Security benefits received by retirees with substantial incomes. These efforts should fail. Keeping the Social Security trust funds solvent is more important than giving a few dollars back to affluent retirees.
The tax credit for children and the proposed reduction in the capital gains tax serve different purposes, even though they're part of the same package.
"Lawmakers need to be clear in their minds that the primary goal of the tax credit is not to promote economic growth. It's to reduce the tax burden on families with children," says Daniel Mitchell, tax expert at the conservative Heritage Foundation.
Cutting the capital gains tax, on the other hand, is supposed to spur the economy by promoting investment and encouraging people to shift capital to more productive enterprises.
There is much talk here about radically reforming the income tax system next year by eliminating deductions for charity and mortgage interest and levying a flat tax without the loopholes now in tax law, but that could be a bitter battle.
Real estate lobbyists contend that eliminating deductions for mortgage interest and property taxes would cost homeowners $1.7 trillion in lost value within two years. True or not, that's the kind of talk that makes lawmakers cringe when it comes time to vote.
As a compromise, Congress should consider eliminating the interest deduction on second homes. It's never been clear why other taxpayers should subsidize somebody's beach house or mountain chalet.