The House passed Friday a tax-cut proposal based on the projected federal budget surplus. The proposal, however, is ill-timed and based upon unsound economic policy. President Clinton, House and Senate Democrats and the Federal Reserve Board immediately denounced the bill, claiming it will inhibit debt reductions and threaten the solvency of Medicare and Social Security. The vote was split almost entirely along party lines and is an admitted attempt by Republicans to claim responsibility for tax cuts in the year 2000 elections. It also offers grossly disproportionate benefits to wealthy Americans.
The bill calls for a tax cut of $792 billion, the largest proposed reduction in nearly 20 years. The reductions would affect all personal income tax brackets, offering each a 10 percent cut that would be gradually implemented between 2001 and 2009. The partisan vote was 223-208, with four Republicans voting against and six Democrats voting in favor.
Assuming the economy continues to grow, the projected government surplus will total $2.9 trillion over the next decade. Rather than cutting taxes, there are a few more pertinent uses for the anticipated surplus, such as the solvency of Medicare and Social Security and the reduction of the national debt. Funds for Medicare and Social Security are quickly being depleted by the demands of aging baby boomers. The national debt, which is currently $3.6 trillion, should be the largest recipient of surplus proceeds.
The proposed tax reduction disproportionately affects the wealthiest Americans. Households in the highest one-fifth earnings bracket would receive almost 80 percent of the income tax reductions. The lowest one-fifth would receive only 0.3 percent of the income tax reductions. Several of the provisions attached to the bill would also benefit the wealthy. The top capital gains tax would be reduced by 25 percent, and the inheritance tax on large estates would be repealed.
Alan Greenspan, chairman of the Federal Reserve Board, advises against the tax cut, to the dismay of many Republicans. A tax reduction is typically implemented in faltering economies to encourage increased spending. However, the current economy is so strong that Greenspan is worried about the potential for inflation. Greenspan’s objection was clear: “Hold off for a while … because the timing is not right.”
The House’s tax bill is only an attempt to appease voters during the upcoming elections, and not a result of considerate deliberations. A tax cut is considered antithetical to accepted policy during a booming economy, when increased consumption is considered dangerous. The projected surplus should be used to guarantee the solvency of Medicare and Social Security, and to reduce and ultimately eliminate the national debt.