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The Coming GOP Congress: What We Can Expect

November 13, 1994|JAMES FLANIGAN

Will the Republicans' effect on the economy be as far reaching as their resounding election victory? It could well be. The particulars of their program, which they call a "Contract With America," and the philosophy their leaders will bring to Congress seem attuned to a historic turning point in American politics.

In their biggest challenge, the Republicans have a chance to alter an unhealthy pattern in entitlements--Medicare and Social Security--in which the young are penalized to benefit the old.

But it is also true that the American people are deeply worried about economic problems and fickle in political loyalties. What the voters really gave the Republicans last week is a two-year tryout, after which there will be a performance review.

So a dollars-and-cents look at the Republican agenda will tell us not only about business prospects and our own pocketbooks in the next two years, but about the longer-term issue of entitlements as well.

In the short term there will be tax cuts for middle-income families in the form of a $500-per-child tax credit or exemption, plus a reduced capital gains tax rate and some expansion of Individual Retirement Accounts.

The child tax credit will take $25 billion to $30 billion a year from the government's revenue and give a boost to the consumer economy. But that credit will have to be offset by spending cuts so as not to worsen the budget deficit and bring on the wrath of the international bond markets.

Those markets so far have cheered the GOP's ascendancy, seeing it as a party of budget cutters such as Sen. Phil Gramm (R-Tex.), co-author of the Gramm-Rudman deficit control law. Gramm favors a more generous tax exemption for children, saying he would offset it with budget cuts from the Departments of Education and Housing and Urban Development.

"I'm told, 'Oh, you're cutting spending for schools and housing,' " says Gramm. "No, I'm not. I'm just changing the spender, letting people keep their money and spend it themselves."

Gramm's words sum up his party's current appeal: lower taxes, smaller government, decisions made at the local level.

The philosophy contrasts directly with that of the Clinton Administration. President Clinton had a child tax credit on his agenda when he took office in January, 1993 (and so will probably go along with one next year). But foregoing $30 billion in tax revenue would have interfered with Clinton's plans to spend on other programs. So he dropped the idea and has ended up with neither credit nor program.

Still, tax cuts are the easy part for the Republicans, who will also propose a balanced budget amendment and try to set it on the years-long path to ratification by two-thirds of the states.

That's where the crunch will come. Balancing the budget, along with the tax cuts, will lower government revenue by $53 billion a year, according to Republican economists on the Joint Economic Committee. There's no way to offset that amount with simple budget cuts in other programs--or with higher taxes, which nobody wants.

So entitlements will have to be cut. Means tests for Medicare--if not yet Social Security retirement benefits--are inevitable, says former Sen. Warren B. Rudman of New Hampshire, a Republican who now leads the Concord Coalition, a private effort to end deficits.

The richer you are, the less government-paid care you would get under the envisioned reforms. The aim would be to rein in the explosive growth in Medicare expenditures, which are projected to go from $140 billion to $234 billion in five years, a rate of more than 10% a year.

Rudman thinks it's ridiculous that bank tellers and bank presidents pay the same amount of tax for old-age medical insurance policies worth $7,000 a year each. He sees the fact that "70% of taxpayers pay more in Social Security taxes than they do in income taxes" as an indication that the system is burdening the young, whose wages are not rising, to pay for many older people who are well able to pay for themselves.

Generational wealth transfers and means testing are very big issues. Are the American people ready to deal with them? The answer is they are divided. One reason budget-cutting Republicans won last week is that people are deeply worried about the national debt, which has reached $16,000 for every American, an unprecedented level.

Broadly speaking, the people are afraid of what the debt is doing to America: Forcing the country to borrow more, imposing enormous interest payments and limiting opportunity for future generations. Their votes for Ross Perot in 1992 and Republicans last week say they want the debt brought down.

Yet they want entitlements, too. It is still politically risky even to talk of limiting Medicare and Social Security. "And means testing is no sure-fire solution," notes economist Barry Bosworth of Brookings Institution. "People have ways of working the system. Many families even now arrange grandparents' assets so they qualify for state-financed nursing care," he adds.

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