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White House Betrayal Leaves Payoff to Party

Budget balance will reinflate the deficit after 2002, a reprise of the supply-side debacle

May 18, 1997|Robert Kuttner | Robert Kuttner is co-editor of The American Prospect

The great bipartisan budget deal of 1997 is turning out to be a hollow public relations coup for Clinton, a strategic romp for the Republicans, and a rout for Democrats. The initial agreement, announced with great fanfare May 2, provided only a bare fra mework for budget-balance by 2002. But as the details emerge, the mischief becomes apparent.

Supposedly, each party gave something and got something. Clinton defended Medicare and Medicaid, and got some money for college aid, children's tax credits, children's health, as well as a restoration of some aid for legal immigrants.

The Republicans got, among many other things, Clinton's support for much of the GOP's tax cutting program. And both parties got to claim credit for reaching, at last, the grail of budget balance.

In the May 2 deal, the net cost of the tax cuts was announced as $85 billion over five years--a relatively modest $17 billion a year. Most commentators approvingly took the bait and congratulated the deal-makers for restraining their impulse to sacrific e budget-balance to tax giveaways.

But now it turns out that the tax-cutting has been massively "back-loaded" with profound changes in the tax code, whose full budget impact occurs only after 2002. This is dishonest budget policy, and bad tax policy. And it threatens to widen the split b etween the President and his own party.

Worse, it busts the budget mainly to give tax breaks to the rich. The tax provisions of the budget deal do include a general tax credit for children (previously embraced by both parties) and a tuition tax credit (a Clinton proposal opposed by leading ed ucators as an inefficient way to subsidize higher education), and the three key Republican tax-policy objectives--expanded tax breaks for capital gains, IRAs, and inheritances.

The two provisions that benefit the middle class--tuition tax credits and the child tax-break, are not indexed for inflation. The Republican provisions are permanent changes in the tax system, that will have ever deeper impact on the deficit over time.

In negotiating final details with the White House this week, Republicans refused to budge on their goals of cutting capital gains rates by nearly 50 percent, indexing capital gains for inflation, and steeply cutting taxes on inheritances.

According to calculations by Citizens for Tax Justice, over 98 percent of the capital gains relief will go to the richest five percent of Americans; likewise 99 percent of the inheritance tax relief. Even the expanded IRA "middle-class" tax breaks will go almost entirely to the top 20 percent.

The details of these cuts are being slyly crafted to stay within the $85 billion target over the first five years. But their impact on the deficit doubles in the second five years, and grows by hundreds of billions more in the third five years.

Consequently, the deficit starts climbing again after 2002, acting as a permanent hammer on what's left of social outlay. Clinton, of course, will be long gone.

Consider the politics of all this. The White House, to reach the entirely arbitrary goal of budget-balance in one arbitrary year, 2002, has set in motion a repeat of the 1981 supply-side debacle: Democrats go along with Republican tax cuts; this increas es deficits, which puts pressure on Congress for more spending cuts. The popular programs that voters associate with Democrats gradually wither away--along with voter enthusiasm for Democrats. And deficit-reduction, rather than the well-being of ordinary people, becomes the central goal of national politics.

It's not surprising that the Republicans would repeat this highly effective gambit. What's peculiar is that Democrats are playing along.

Of course, not all Democrats support the deal, which was negotiated between the White House and key Republicans. Congressional Democrats will introduce their own substitute tax package, targeting relief to the middle class and the poor.

That will usefully demonstrate a key difference between the two parties. But that distinction will be largely blurred because Clinton is, at least nominally, also a Democrat. And since Republicans control Congress, the Democratic substitute will lose.

Then it will be up to Clinton to decide whether to veto the budget deal. But it was Clinton who brokered the outlines of this deal, with the Republicans, over the objection of key Democrats. In the end-game, Clinton will likely mutter a few objections a nd proclaim the budget deal a great bipartisan achievement, as he did with welfare reform--hanging his party out to dry once again.

There is a pattern here. Republicans should think twice about harassing this President over Whitewater. They can hardly do better.

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