WASHINGTON--The endorsement delivered last week by Federal Reserve Board Chairman Alan Greenspan makes it a virtual certainty that Congress will pass a major tax cut this year. Tax-cutting was a centerpiece of President Bush's campaign and Democrats accept the concept, while disputing many of the specifics.
The serious debate now centers on how large the tax cut can be without jeopardizing other claims on the growing budget surplus. Bush has expensive military and domestic policy initiatives on his agenda, and there is bipartisan agreement on paying down the national debt in order to assure that funds are available to meet the costs of Social Security and Medicare when the baby boomers retire.
An innovative suggestion for reconciling tax cuts with these other objectives has been circulating on Capitol Hill, but so far has not become part of the public debate. The idea is to institute a "surplus rebate" program as an alternative to a standard tax cut.
It comes from two former Republican congressional staffers, Steve Hofman and Ed Kutler, both now working as consultants in the private sector. They suggest that instead of cutting taxes now, and just hoping that the budgetary impact will not jeopardize the other goals, a portion of each year's actual budget surplus be promptly returned to taxpayers as a rebate.
In the example they use in their memo, they suggest that one-quarter of the surplus from the fiscal year ending Sept. 30 be divided among the head of household taxpayers, with rebate checks going into the mail two weeks before Christmas.
The fiscal 2000 surplus was roughly $237 billion. Dividing a quarter of that surplus, about $59 billion, among the roughly 60 million head of household taxpayers would produce rebates averaging almost $1,000.
Admittedly, this is not long-term or comprehensive tax reform. It does not address any of the inequities or loopholes in the internal revenue code. It does not take account of the possible need for counter-cyclical tax cuts in a prolonged economic downturn, when budget surpluses would shrink or disappear.
But it is well-adapted to the current situation, where surpluses exist and are likely to increase, but where current and foreseeable needs place other demands on those resources.
The main advantage of this plan is that it relies on actual surpluses, not guesses of future surpluses, which, as Greenspan cautioned, often have been far off the mark. It guarantees that the bulk of those surpluses will be reserved for current and future national needs, including debt reduction. Allocating one-fourth of the surplus to tax reductions is very much in line with Bush's own proposal--but his plan relies on those shaky future projections.
This plan also creates a broad and strong constituency for economy in government. Any new spending proposal would encounter the argument that it would reduce the rebate kitty by that amount and cost the average American family a specific number of dollars.
Yet another advantage is that deciding how to divide the tax rebate would force Congress and the administration to confront the distributional effects of tax policy in clearly understandable ways. In their memo, Hofman and Kutler suggest a simple formula. Taxpayers would be grouped into four quadrants, depending on the size of their previous year's tax bills. Those in the middle quadrants would get a dollar amount that is slightly more or slightly less than the average rebate. Payments to the top quadrant would be highest, but would be capped at double the average amount. People in the bottom quadrant would get least, but would be guaranteed at least half the average payout.
That would give more dollars to those most heavily taxed, but the highest percentage reduction to those at the bottom of the income ladder, and would assure that most of the money went to middle-class taxpayers.
That is only one of many possible formulas, but the debate on dividing the surplus rebate would be a valuable test of party philosophies, with compromise the likely outcome. Neither party would want to accept political blame for blocking the rebate plan from taking effect.
Finally, Hofman and Kutler note that if people believe that short-term stimulus is needed this year to avoid a recession, passing a rebate plan this spring and keying the first-year distribution to the surplus posted in fiscal 2000 would enable the first checks to be mailed this fall--a quicker shot in the arm than is likely by any other means.
I am no tax expert and there may be flaws in this scheme of which I am unaware. But it could be a way of achieving the major objectives of both parties.
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