'Christmas Trees' for Congress

JOHN KENNETH GALBRAITH, the elder statesman of economics, was in town last week telling Congress that tax cuts aren't going to jolt the economy out of its recession.A succession of other economic experts, testifying before the House Budget Committee, added to the blast of cold air aimed at Congress and the Bush administration, both of which are gearing up tax-cut plans and economic growth packages. The collective message: Not only would tax cuts not jump-start the economy, they might even have the opposite effect. If a tax cut were to add to the budget deficit, that could prompt a boost in long-term interest rates. If a tax cut was structured to pay for itself - e.g., through a raise in taxes elsewhere in the system - in accordance with last year's budget deal, the net effect could be neutral. And if the effect of a tax cut were to be felt after the economy began to recover, it could spark inflatio n and hinder the recovery. But the presidential campaign is upon us, and the name of the game is politics. "Historically, in an election year economic decisions are driven much more by politics than economics," says a senior House Budget Committee aide. "Economic projections are just that - estimates," the aide continues. "Economists can't tell you what will happen. But what the politicians do know is that tax fairness is going to be an issue in this campaign." For months, Democrats have been harping on the theme of the economically stretched middle class. Senate Finance Committee chairman Lloyd Bentsen (D) of Texas opened last Thursday's hearings on taxes and the economy by citing new Congressional Budget Office statistics showing middle-income families' taxes going up during the '80s while income declined. The White House has now joined the pro-middle class bandwagon. In congressional testimony, budget director Richard Darman sketched the outline of what analysts call a likely scenario for the Bush administration's final economic package: a tax break for the middle class combined with a cut in the capital-gains tax and a tax credit for business investments in capital improvements. In other words, the final package is likely to have something in it for everyone. And therein lies a potential major pitfall in a year when politicians will be particularly keen to show the American public that they are looking out for its interests. Call it the "Christmas tree syndrome." According to the Budget Committee aide, nearly 600 tax bills have been introduced in the House of Representatives, with titles like "Working Family Tax Relief Act" and "Middle-Class Tax Relief and Fairness Act of 1992." With each member eager for his or her pet idea to be included in the final bill, the tendency is for it to become a "Christmas tree" of amendments and additions. Rep. Leon Panetta (D) of California, chairman of the House Budget Committee, is one member who is arguing for doing as little as possible - but realizing that Congress must be seen doing something about the nation's lingering recession so as to boost consumer confidence. "We are increasingly putting ourselves in a position that when we return (in January), the pressure will be on to produce something, to move quickly," Representative Panetta told reporters at a Monitor breakfast last week. "We can wind up creating a greater backlash when the public finds out we can't do what we're promising." The public and the markets have been particularly touchy about economic news. Panetta says the "fragility" of the situation is reflected when, as he sees it, the president's sound bite on credit-card interest rates caused a 120-point drop in the stock market. His prediction is that the president and Congress won't be able to put together an economic growth/tax-cut program quickly when Congress reconvenes. "Assuming the president and Congress can't put a tight package together, there will be a veto confrontation," he says. "There could be a huge continuing resolution that takes us past the election." Eugene Steuerle, a senior fellow at the Urban Institute, sees a number of forces at play on the tax question. There are the political parties, which need to define their positions for the campaign - a force that works against agreement on legislation. Then there are the individual congressmen, each of whom is up for reelection in November, as are one-third of the senators. Their need to show constituents that they're working to help them is a force that pushes them toward consensus. Overlaid on that is the recessed economy, which has continuously defied predictions of early recovery. The nation's doldrums have proved fertile ground for a resurgence of old tax debates, such as the question of whether capital-gains taxes should be cut - a proposal that tends to be favored by Republicans and which many Democrats complain would disproportionately favor the upper class. As Congress raced to adjourn by Thanksgiving, the issue was thrust back into the limelight by House minority whip Newt Gingrich, who seized on the White House's slow movement in putting together an economic- growth package. The Georgia Republican's maneuvering did not spur any sudden votes on tax legislation - but it has spawned a series of Capitol Hill economic hearings since the holiday that have provided a forum for congressional Bush-bashing. Senate minority leader Robert Dole of Kansas supports a plan for a two-phase tax reform. The first phase, middle-class tax relief, would be passed soon after Congress returns from the holiday. Then later in the session, Congress would vote on a broader tax-policy package. Since there's not a lot of argument against middle-class tax relief, says Dole spokesman Walt Riker, Congress should be able to come together on it quickly. "It won't revive the economy, but it would help boost confidence by putting some money back in people's pockets," he says. Sen. Lloyd Bentsen (D) of Texas, chairman of the Senate Finance Committee, does not like the idea. "I don't think the answer is to have two Christmas trees," he said in a statement. Senator Bentsen's own proposal includes a $300 tax credit for every child under 18 and would expand Individual Retirement Accounts to all taxpayers. His plan would cut US government revenues by $72.5 billion over five years, which he proposes making up by cutting defense spending. In the House of Representatives, Ways and Means Committee chairman Dan Rostenkowski (D) of Illinois proposes an income tax credit equal to 20 percent of the Social Security-Medicare payroll taxes paid by employees, up to at most $400 for couples and $200 for individuals. The tax cut would last two years and cost $45.8 billion. It would be paid for over five years by raising the top income tax rate to 35 percent. Representative Gingrich's plan, which the Bush administration supports in part, would reduce the capital-gains tax rate through an exclusion and by indexing for the basis of capital assets. Gingrich's "Economic Growth Act" would also authorize tax incentives for up to 50 enterprise zones and would raise the amount an individual can earn before paying tax on Social Security.