Republican Revolution Wins One For Big Government

Michael W. Lynch | May 14, 1997

The recent budget deal announced by the White House and Congress shows that the so-called Republican revolutionaries have learned the secret of governance: Pay lip service to shrinking the government while working with your sworn enemies toward expanding it.

After receiving a $ 225 billion windfall in projected tax revenues as a result of unexpectedly strong economic growth, congressional Republicans cut a deal that let supporters of big government lock in real gains. The deal includes a massive new entitlement for child health care, an expansion of welfare benefits for non-citizens and yet another welfare-to-work tax credit, none of which has been successful.

In exchange, congressional leaders secured ephemeral reductions in entitlement spending, such as an assumed $ 115 billion savings in Medicare from price controls, and a promise of $ 85 billion in tax reduction over five years, a mere 1 percent of the government's expected $ 8 trillion take.

The deal is a typical Washington sham. Of the $ 350 billion in deficit reduction, less than 1 percent comes from actual policy changes, Sen. Phil Gramm remarked (R.-Texas). Ninety-nine percent of the deficit reduction is assumed. "This is like having a crisis in your family budget and assuming that you are going to win the lottery," Gramm said recently.

Gramm's pillorying of the deal is refreshing and necessary. But the problem lies as much in the Republicans' goals as in the specifics of their capitulation to President Clinton.

Even if the deal wasn't a sham, it would be poison because it underscores Washington's fixation with targeted tax cuts _ behavior modification via the tax code _ rather than broad-based tax simplification and rate reduction. This infatuation with social engineering on the cheap unmasks the true beliefs of Washington's political class: Members of this class think they know how to spend taxpayers' money better than we do.

Consider the presumed $ 85 billion in tax cuts. President Clinton managed to secure $ 35 billion (roughly 40 percent of all tax savings) for a college-tuition tax credit.

While the initial costs of college tuitions and fees are expensive, the higher lifetime earnings of those who get a college education may lower the real, long-term costs of higher learning.

Furthermore, because the potential supply of full-time college students is more or less fixed in the short run, a tuition tax credit would allow colleges to increase tuitions.

Students and their families wouldn't notice the higher costs initially because they could simply write them off on their 1040 tax forms.

What about the other 60 percent, the $ 50 billion in tax cuts that Congress has to play with? The bulk of it will go to a $ 500 per child tax credit. This may be good politics. But like so much that Washington churns out, it is destructive policy.

First, a reality check. Sen. Gramm points out that, if applied to everyone, the tax credit would have originally cost the Treasury $ 105 billion over five years.

Since Congress only has $ 50 billion in its fiscal sandbox, any per child tax credit would have to target either lower-income families alone or be cut off before children reach age 18.

This tax credit would also compete with (and likely rule out) popular alternatives like abolishing the inheritance tax or cutting taxes on capital gains.

But even if money abounded, the per child tax credit is bad policy. Since it is a lump-sum payment, it would not lower tax rates. The economic (as opposed to moral) case for tax cuts is that people tend to work harder and earn more when the government takes less of their paychecks. Since this tax cut would not reduce marginal rates, any dynamic economic benefit would be small.