Clint's Window: Clinton's Tax Cut (9/23/96)

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	When Is A Tax Cut A Tax Increase? Clint's Window by Clint Stretch, Director Tax Legislative Affairs, Deloitte & Touche LLP September 23, 1996

Different assumptions, different results

House Ways and Means Committee Chairman Bill Archer, R-Texas, Sept. 11 accused President Clinton of seeking to raise -- not lower -- taxes, wielding as proof a report that obscures President Clinton’s own tax-cut proposals by linking them with tax changes Congress already has passed.

Archer’s conclusion is based on an analysis of the President’s proposed tax cuts released by the staff of the Joint Committee on Taxation (JCT). In this analysis, the JCT staff estimates the effects of the President’s tax-cut proposals over four years, but also measures increases of $64 billion over 10 years.

The JCT staff also released an analysis of Republican presidential candidate Bob Dole’s tax-cut proposal, which concludes that Dole’s plan cuts taxes by $1.1 trillion over 10 years. The basis for the different estimates of the long-term revenue effects hinges on the mechanism Clinton and Dole would select to force a balanced budget.

When he crafted his plan, Dole assumed that in response to a constitutional amendment the budget will be balanced in the next few years. His tax plan includes permanent tax cuts.

Will Congress act?

President Clinton, though, is not willing to assume that Congress will have the discipline to achieve a balanced budget. He seeks to ensure this discipline by conditioning his largest tax cuts -- the child tax credit, more generous individual retirement accounts, and college tuition tax credits -- on the government balancing the budget.

Clinton’s proposed budget for 1997, which includes many of his tax-cut proposals, includes triggering mechanisms to ensure fiscal discipline. These mechanisms guarantee that most of his tax cuts will remain in effect after 2000 only if the government meets deficit reductions targets (the target for 2000 is a $90.7 billion deficit reduction from the current deficit). He’s unwilling to commit to permanent tax cuts, without knowing what will happen to the budget deficit.

How did the Joint Committee staff reach the conclusion that Clinton’s tax-cut plans actually raise taxes?

First, by starting with Dole’s and Clinton’s different assumptions about the budget, the Clinton plan was doomed to look worse if the effects were studied over a 10-year period. Clinton’s tax cuts cannot be assumed to stay in effect after 2000, since the deficit is not yet eliminated.

Second, the staff of the Joint Tax Committee also charged Clinton with some tax changes as if Clinton is proposing them, ignoring that they already have been passed by the Republican-controlled Congress and signed into law.

Usually nonpartisan

For example, the analysis gave Clinton credit for about $6.5 billion in tax cuts included in recently passed tax legislation, including the deduction for health insurance premiums paid by the self-employed, the increased immediate expensing limits for small businesses, and pension simplification provisions. Next, the analysis charged Clinton with $13 billion worth of tax increases that Congress already passed, suggesting the President still is proposing them even though they are already law.

Finally, President Clinton’s tax cuts for individuals total about $93 billion over five years. To pay for part of these tax cuts, Clinton also proposes about $43 billion worth of permanent tax increases over the next five years, mainly focused on businesses. Since the President is seeking to ensure a balanced budget, those increases won’t go away. When the JCT staff did their calculations they counted these increases for the whole 10-period, but counted the tax cuts for only the first four years.

Many Washington tax policy experts were surprised that the usually nonpartisan staff of the Joint Committee on Taxation allowed itself to be used to attack President Clinton in such an apparently partisan way. If the analysis assumed the budget might be balanced, the conclusion about the 10-year effect of President Clinton’s tax-cut plan would be completely different.