Santa Claus or just trying to save his sagging presidency? That's the question about President Clinton in the wake of his Dec. 15 speech promising a "middle-class bill of rights" that included a $60 billion proposed tax cut. Republicans, too, are scurrying to offer tax cut plans, as has the Democratic leader in the House of Representatives, Richard A. Gephardt. The president's plan, like the others, has so far been matched with only much smaller proposals for spending cuts. The bottom line: Is a tax cut needed? And how should it be shaped in order to keep the unintended side effects from hurting more than the tax cut helps?
David A. Wyss,
Economist/Research director,
DRI/McGraw-Hill
I'm all in favor of tax cuts as long as they're balanced by spending cuts. We still have a major deficit and cutting taxes doesn't solve anything -- it makes it worse. That's the problem with both the Clinton plan and the Republican plan. I haven't seen anyone come up with the money. You're letting people keep your own money, yes, but you still have a deficit and you're still spending money you don't have. The longer you keep doing it, the deeper the hole you dig for yourself. We're down a few stories.
The president's proposed $24 billion in spending cuts is a start. I think he should go farther. Frankly, I think we should shut down several of the Cabinet departments, or combine them.
Obviously we should cut government consumption items rather than investment. I would reform welfare. A lot of the energy subsidies were started in the 1970s and no longer make sense. A lot of the agricultural subsidies make no sense -- never did . . . . Fourteen percent of the budget is now interest payments on our past deficits, 80 percent of it deficits from the past 12 years.
More important, deficits are a drain on investment. Government is borrowing funds that can be used for private investment. Deficits are not supply-side economics; they are its antithesis, because they absorb the supply of investable funds in the private sector.
Michael A. Conte,
Director
Regional Economic Studies,
University of Baltimore
You can say that it's not that big to serve as a stimulative force in the economy. I'm not sure that's true. It's going to be concentrated among people who itemize, so even though it's only $60 billion, it's concentrated among a small fraction of all filers. Those people will probably spend that money fully and there fore it will provide more stimulus than if it were spread around . . .
One last thing is that I really don't think this is a time to be thinking about revenue-neutral changes. We need to be thinking about deficit-reducing changes. If we can figure out a way to wrench changes out of the spending side, and if we can save $10, $20, $50 billion whatever it may be, that's still just a down payment on the deficit, which is itself just a down payment on the debt. If we don't start making inroads on the deficit, by the time we get into the next recession, we are going to be talking about $500 billion or $600 billion deficits.
We're going to be in a situation where 40 percent of the federal government's spending is going to be interest payments on the ZTC debt. . . If it weren't for the interest payments, we would be able to lower taxes by 30 or 40 percent.
The irony of it is that the whole thing was started by the Reagan Revolution, whose goal was to lower taxes. It did so in the short run, but the long-term impact is to increase taxes -- and to pay for a dead-weight loss, the interest payments, not for anything productive.
Stuart Hoffman,
Chief economist,
PNC Bank Corp., Pittsburgh
I don't think the U.S. economy needs a middle-class tax cut from the point of view of providing additional economic horsepower. The economy in 1994 is going to have the best year it has had since 1988.
You have an economy that is pretty close to what economists would call its potential. What you probably don't want to do now is layer on a tax-cut stimulus. I think it would be potentially inflationary . . . And to the extent that it gets the financial markets or the Federal Reserve nervous, it adds to the pressure on interest rates.
The two cancel each other out, and the net may be that you are worse off. . . .
Given that there is a tremendous amount of effort that's going to be expended by both Republicans and Democrats to hand out some tax cut goodies, I think its imperative that it be matched by credible, enforceable spending cuts. I can tell you that the public and the financial markets . . . are going to be skeptical with good reason. We've heard this song before.
It has been easier to give all the details of how the tax cuts are going to help this person or that person or how much money it's going to put in people's pockets, and we get one page of information on where the spending cuts will come from, with X dollars to come from savings yet to be determined. That kind of catch-all isn't going to fool anyone.