Clint's Window: Dueling Tax Cuts (6/24/96)

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	The Battle of the Tax Credits Clint's Window by Clint Stretch, Director Tax Legislative Affairs, Deloitte & Touche LLP Monday, June 24, 1996

A Tax Credit Here, A Tax Cut There, Pretty Soon We’re Talking Real Money

Despite the talk in the Republican primaries that it’s time to make the tax system flatter, fairer, and simpler, in their campaign duel of tax cuts and credits, neither Bob Dole or Bill Clinton is talking about preserving the tax hoard necessary to make reforming our tax system possible. Because the costs of switching tax systems are so enormous, the government will need a big kitty ready to cover transition costs.

What the heck is going on in Washington? Just six months ago, Dole and Clinton were claiming that reducing the deficit is their top priority. Now both candidates are pushing tax breaks as if the deficit didn’t exist.

Most traditional conservatives don’t want the government to use the tax system to try to manipulate behavior. Although Bob Dole may be trying to curry favor with traditional conservatives by proposing tax cuts (lowering taxes always wins the hearts of conservatives), his proposal to offer a $500 tax credit for people who donate money to charities that fight poverty shows his true stripes as a moderate who will occasionally use the tax system to accomplish certain goals.

This credit is not a bit neutral. It encourages people to donate to private sector charities fighting poverty. The credit would not be extended to other worthy causes, such as fighting cancer, AIDS, or domestic violence.

Encouraging Education and Adoption

President Clinton also has jumped wholeheartedly onto the tax-cut bandwagon with his proposal for a new higher education tax credit. This $1,500 annual credit ought to cover tuition for a year at the average community college, the President claims. If the student gets at least a B average, then he or she gets the credit for another year. So this credit doesn’t just encourage people to go to college, it encourages them to get good grades while they’re there.

Then Dole bashes Clinton for proposing this cut, even though he has his own education booster: Dole wants to use money in individual retirement accounts to cover the costs of education. Same behavior he’s using the tax system to encourage, different tax strategy.

Another popular idea: The $5,000 adoption tax credit, which everyone in Washington seems to support.

Also, Republican strategists are considering proposing a 15% across-the-board tax cut. Such a cut would costs billions, and would make balancing the budget any time soon nearly impossible.

And the pièce de résistance: the Republican push, led by Bob Dole, to repeal 4.3 cents of the gasoline tax. Every penny of that money went to lower the deficit. If lowering the deficit is truly the most important thing, isn’t such a tax worth keeping?

No Balance, No Reform

There’s a basic disconnect here. Americans are asked to believe two things at the same time:

It’s crucial that we balance the budget.
We need to reform the tax system.

But look at what’s happening. All these tax-cut ideas are moving us further from both goals.

Adding the costs of all these tax credits to the budget leaves no money to reduce the deficit without massive, politically unpopular spending cuts.

Clinton and Dole are proposing tax credits that make the tax system more complicated, not flatter or simpler; less neutral, not more neutral.

With Dole’s more than 35 years worth of Washington experience, he knows that if he tried to use the budget to put money into new programs to alleviate poverty, they probably wouldn’t pass.

Instead, he decided to spend money indirectly through the tax system that he couldn’t spend directly through the budget.

We have in effect an open-ended appropriation of tax money, but no government oversight of how the money is spent (since private charities will be doing the spending). This is not by any means making our tax system more neutral or more simple.