Commentary: The Political Lube Job They're Calling Tax Reform

Early this year, Gucci Gulch was awash with dreams of big tax cuts. Well, the tasseled-loafer set finally has a tax package to chew on, as part of the grand balanced-budget deal. But the accord, which allows a ragged assortment of breaks totaling $85 billion over the next five years, leaves much to be desired.

Economic justification? Don't bother to look for any. Rather, the proposals are simply political lubricant to smooth passage of the budget deal. Democrats, who hate the budget plan's spending restraint, get "middle-class" tax breaks. Republicans, who deride the spending curbs as too puny, can crow over "pro-investment" initiatives. Clinton gets his cherished education tax credits, even though they may serve mainly to drive up college tuition. "Is there any redeeming social or economic value in any of these proposals?" asks former Congressional Budget Office Director Robert D. Reischauer. "No."

Just look at them. The capital-gains rate likely will be cut to around 20%, from 28%. But at the current 28% rate, stocks already have roared into the stratosphere and capital spending has grown by double digits for five years. One wonders where all that new investment would go. Empty office buildings, perhaps?

WINDFALL. The universal IRA, a favorite of Wall Street, will be expanded, probably by gradually doubling the income limits to about $100,000. This even though 15 years after IRAs were made broadly available, economists still can't decide whether they have actually increased national savings. A final bill also will likely add "backloaded" IRAs that offer no deduction for contributions but allow tax-free withdrawals. That new approach would be the mirror image of current IRAs, which permit tax-free contributions but tax withdrawals. Why the change? While it will cost billions down the road, it generates lots of money by 2002, when the pols have promised budget balance.

Then there's the child credit, which the GOP demanded to appease the Religious Right, and estate tax relief--a windfall for 30,000 rich American families--which is the top priority of the powerful small-business lobby. Both are simply political baubles that will do little or nothing to improve the economy.

With such a cornucopia of bad ideas, the good news is that each will be so limited that none can do much damage. That is, unless Congress and the President undo the budget deal and start the sort of bidding war that turned the 1981 budget pact into a fiscal nightmare. Credible deficit reduction is the best thing that Washington can do for average Americans. If there's going to be tax relief at all, it should be an across-the-board rate cut, which would provide a much bigger economic payoff. A special-interest giveaway jeopardizes both a balanced budget and sensible tax policy.

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