The Tax Cut: Will It Rest in Peace or Shine in Glory?

Bill Frenzel
Bill Frenzel
Bill Frenzel Former Brookings Expert

March 1, 2000

To the surprise of no one, the massive Republican tax cut bill of 1999 sank from sight as soon as President Clinton vetoed it. Having passed it by slim margins, the GOP majority in Congress made no attempt to override, and a huge public yawn soon stilled brave Republican tax cut talk. The year ended anticlimactically with the extension of a handful of expiring tax cuts.

Tax Expectations: 2000

Republican leaders in Congress are singing a more subdued song this year. Plans center on tax cuts only about one-sixth as large as last year’s. This year’s brave talk is that the president will have to sign the bill. Don’t bet the lunch money on that.

President Clinton routed the Republicans with his veto of the Gingrich Reconciliation Bill in 1995. He vetoed the tax cut last year. In between he routinely overpowered Congress on spending decisions. With congressional margins thin, the lame duck is still more than a match for Congress.

This year tax policy will get far more attention on the campaign trail than at the Capitol. Presidential candidates can make tax promises secure in the knowledge that future surpluses will not be imperiled by tax cuts. Tax policy changes, if any, will be small. To do more, Congress will have to move farther toward President Clinton than it is usually willing to go. In a presidential election, with the House of Representatives perceived to be up for grabs, neither party is in a hurry to make the other look good. Also, the chairman of the Senate Finance Committee has a tough reelection fight this year. He is certainly not looking for failed causes.

That leaves a relatively clear tax field for the presidential candidates. The Republicans, in differing degrees, prefer to return future surpluses to taxpayers. Both Democrats want to spend much of that surplus on expanded health programs, with emphasis also on education and the environment. Congress will not be a pushover in 2001, but the next president can have a strong say on the direction of tax and fiscal policy for the coming decade.

Tax Cut Probabilities in the New Millennium

Today Americans prefer paying down the debt to receiving tax cuts. Because future surpluses are not guaranteed and because taxpayers cannot easily see how much of the surplus is their share, that attitude is not irrational. But if the surpluses continue to grow as predicted, taxpayers may want their hour in the sun too.

This year, according to the Office of Management and Budget, we are being taxed at a rate of 20.7 percent of gross domestic product—the second highest rate (after 1944) in U.S. history. The rate may be lower than that in most other developed countries, but it has always been so.

While citizens have not yet accepted the “You deserve a cut today” message, they also lack confidence that federal spending programs are effective. When the message becomes “Congress, or the president, will spend the surpluses if they are not returned to the taxpayers,” it resonates a little better. Spending ceiling violations in fiscal 2000 and the almost certain prospect of more violations in fiscal 2001 lend that message credibility.

Counterarguments that surpluses are not guaranteed and that paying down debt is better for the economy are valid and useful to the tax cut debate. But if the good times continue to roll, the arguments will diminish in effectiveness. The redistributionists’ lament that tax cuts go to affluent people is undeniable, but it ignores the idea that tax cuts ought to go to taxpayers. While a progressive tax system is worth maintaining, it is not essential to make it more progressive with every tax cut.

In this same vein, the tax code is not necessarily the way to boost the income of low earners. Tax incentives have limited effectiveness. Refundable credits—tax cuts for people who do not pay taxes—work fine until the system is overloaded and the claimants figure out how to make it work. Big income supplement plans are better placed, better managed, and certainly better policed in a traditional spending program.

In short, the debate between the pro-cut and anti-cut forces is settled for 2000 and probably for 2001, but the tide may turn after the first year of the new presidency—unless Democrats control both houses of Congress and the presidency.

A Better Solution

By 2001 it will be time again to consider comprehensive tax reform. The last major reform was in 1986 (the one before that in 1969). Yearly tax bills in the intervening years have complicated the code. The way companies and individuals handle their business has changed dramatically. The way in which they are taxed has not. Old mistakes have been exacerbated by new conditions. Because of the way tax law is made, the tax system is awkward at best, but after years without overhaul, it has become nearly unmanageable—bad for the taxpayers and worse for the tax collectors.

Simplicity has been a goal, but never an achievement, of tax reform. In a complicated society, perhaps it is unattainable. Workability is a more achievable target, given the tax policy perpetrators’ predilection for complication. Workability lacks the “buzz” of simplicity but serves a similar purpose.

Some day the system will have to be friendlier to saving and less so to consumption. The payroll tax has become a disincentive for employers and an excessive burden for individuals. Globalization has made equalizing the tax load on domestic and imported goods and services more important. The list of other needed improvements is lengthy.

If the time for a tax cut ever comes again, it would be wonderfully convenient to use its balm to assuage the pain and suffering that will inevitably follow serious reform. For such a combination, leadership both lofty and cunning is required. Major tax bills don’t happen spontaneously. Congress is not a good initiator. It needs White House leadership. The odds on impossible dreams are never very good. Stalemate is much more likely. But dreams are what candidates run on.