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INSIGHT | TIMES BOARD OF ADVISORS

Whose Is the Best Tax Plan for the Working Stiff?

September 08, 1996|ROBERT EISNER | ROBERT EISNER is William R. Kenan professor emeritus of economics at Northwestern University in Evanston, Ill. He is the author of "The Misunderstood Economy: What Counts and How to Count It."

The real issue this fall is not whether to cut taxes. It is how much to cut them--how, and for whom. As matters stand now, there are some similarities but huge differences between the proposals of President Clinton and those of his Republican challenger, Bob Dole.

The $500-per-child tax credit offered by Dole is the major element in his plan offering benefits to the middle class. It would be available in full for families with taxable incomes of up to $75,000 and dependents up to the age of 18 and would phase out completely at incomes of $110,000. The congressional Joint Committee on Taxation, or JCT, has estimated the annual cost in tax revenues by 1999, when the credit would be fully in place, at $18 billion.

Clinton also proposes a child tax credit of $500. His more modest plan would cover children up to the age of 13 and families with incomes of up to $60,000, and would phase out completely at incomes of $75,000. It would thus apply to fewer taxpayers than the Dole credit but would nevertheless provide tax relief to 19 million families with 37 million children. The Office of Management and Budget estimates the 1999 tax loss to the Treasury at $8.9 billion.

Dole would include in taxable income only 50% of Social Security benefits instead of the 85% enacted in 1993 tax legislation for retirees with relatively higher total incomes. The JCT estimates this revenue loss at $4.9 billion in 1999. It may be worth pointing out that this would be a loss to the Hospital Insurance Fund (Medicare, Part A), to which, under current law, the taxes on that extra 35% are credited; the Social Security trustees have warned that under current law that fund will be exhausted in five years.

Dole would cut all capital gains taxes in half, reducing the maximum rate from 28% to 14%. Estimates of the resulting revenue loss vary widely because of varying predictions of how much taxpayers would increase their taxable sale of assets, which created $144 billion in gains in 1994.

The Republican-controlled Joint Committee on Taxation estimates that tax revenues would increase greatly as investors took advantage of the lower rates to realize previously locked-in gains. The JCT says revenue losses would come to only $1.9 billion annually in 1999, rising to $6.3 billion by 2001. If capital gains realizations settle down after an initial surge, more sober estimates of the revenue loss in 1999 would be on the order of $10 billion to $20 billion. And those do not allow for further losses in revenue as taxpayers would increasingly find ways to convert ordinary income into lower-taxed capital gains.

Clinton would not reduce capital gains taxes in general, but he would almost completely eliminate those relating to the sale of homes. The Treasury estimates that this would cost a total of $1.4 billion in the next six years.

The largest item by far in the Dole package is the 15% across-the-board rate reduction. When fully phased in, this would cost $90.6 billion in 2000, according to the JCT. The figure would rise to $101.6 billion in 2002, when the budget is supposed to be balanced.

Much of the Clinton tax cut program is focused and purposeful, rather than general. It proposes a $10,000 tax deduction for education and training expenses, including college tuition, that would provide benefits of up to $2,800 for families with incomes of up to $100,000. It would also include a $1,500 refundable tax credit for the first two years of college. This means that those too poor to pay income taxes equal to the credit, or to pay any income taxes at all, would actually receive payments. This could affect a significant number of taxpayers. Of 116 million personal income tax returns filed in 1994, about 28 million showed incomes so low as to incur no tax liability.

In his nomination acceptance speech, Clinton also proposed a new tax incentive to encourage employers to hire workers off the welfare rolls.

The Office of Management and Budget estimates the total revenue loss of all of the Clinton proposals, other than the tax incentive for employers and the capital gains tax reduction for home sales, at $17.5 billion in 1999 and $23.2 billion in 2002. The Joint Committee on Taxation puts the Dole losses at $101.4 billion in 1999 and $129.9 billion in 2002.

Dole promises: 1) to balance the budget while offering huge cuts in taxes and 2) to increase defense expenditures while protecting Social Security and Medicare, the major elements in the budget. It would seem virtually impossible to keep the first promise without closing down most of the government for good or, as acknowledged by Dole campaign co-chairman Sen. Alfonse M. D'Amato (R-N.Y.), breaking the second promise.

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