A Big Tax Cut

With the Senate bogged down in an impeachment trial, the House can turn its attention to the single most important piece of legislation for this session: a big, juicy tax cut.

After years of patchwork bills stressing favors for interest groups -- child credit for the religious right, capital gains cuts for Wall Street, etc. -- reformers are finally getting smart. Sentiment is beginning to coalesce around a simple 10 percent across-the-board reduction in tax rates.

Lower rates are better than targeted relief because: (1) They are fairer, since they don't discriminate by rewarding only taxpayers favored by politicians and lobbyists, and (2) They encourage people to work and invest more, since taxpayers keep more cents out of each extra dollar.

There are two other reasons for a tax cut:

First, it would provide what Lawrence Lindsay, former Federal Reserve governor and my colleague at the American Enterprise Institute, calls "dearly needed economic insurance." Spending by U.S. consumers is keeping the world economy afloat, says Lindsay, and it's uncertain they can keep up the pace -- especially with taxes running at a postwar high. A tax cut would put more money back in their hands.

Second, the federal government is running a surplus. And last year we got a good demonstration of what politicians of both parties do with a surplus. They spend it -- often on pork-barrel projects such as the highway bill or on subsidies to favored groups such as farmers.

A tax cut would deprive both parties of that surplus. Americans could decide what to do with their own income -- save it or spend it on education, clothes for the kids, a new house. It's theirs, after all.

In his State of the Union address a year ago, President Clinton said he would reserve "every penny of any surplus" for Social Security. Instead, joining with Republicans, he boosted federal spending by an extra $20 billion, getting around budget rules by calling the new outlays an "emergency."

Since the big surplus in 1998 was a surprise, the new spending was just a preview, a warning of what we'll see when politicians really get going. The 1999 surplus is now pegged at $63 billion, but that figure will rise when the perennially pessimistic Congressional Budget Office makes adjustments later this month.

Since 1992, tax revenues have been rising at 8 percent annually, an incredible pace in an economy with less than 2 percent inflation. But for 1999, the CBO projects revenues will rise only 4.4 percent; they are already running well ahead.

A surplus of even $70 billion would be enough to fund a 10 percent across-the-board cut, and additional reductions can follow with surplus estimates now running over $100 billion annually after 2001.

But what about Social Security? Clinton's 1998 State of the Union promise was just a ruse, and it worked. He never presented a plan to "save" the system -- nor did he show how surpluses have anything to do with Social Security.

They don't. In 2013, the retirement system will start to take in less in payroll taxes than it spends on benefits. How will the shortfall be met? Not by the trust fund, which is full of IOUs but, as Milton Friedman wrote yesterday in the New York Times, "By taxing, borrowing, creating money or reducing other Government spending. There are no other ways."

Through last year's brilliant deception, Clinton got extra spending and scared Republicans away from a tax cut. Without a tax relief bill (even one vetoed by the president), the GOP had no strong issue -- other than the Lewinsky scandal, which badly backfired -- for the congressional elections, which proved a debacle.

Now, it seems, Republicans, especially in the Senate, where last year's half-hearted bill died, realize their folly. They are ready to cut taxes, but they have two concerns: first, polls that fail to show Americans think cuts are urgent and, second, Social Security.