Why the Wild Dancing at the Tax Cut Follies?

There before the cameras in Washington, DC were Republicans and Democrats, their grins so big their fillings were showing as they cheered the tax cut deal. Oh, boy, we’re all going to get re-elected in ’98, those wild smiles said. The exuberance points either to the finest accomplishment of political compromise in our time, or to a grotesque absence of visionary national leadership. The latter, alas, is the case.
In years to come pictures of the gaiety surrounding the tax act of 1997 may remind documentary watchers of the films of speakeasy revels in the 1920’s–before the Crash. Powered by technology, the private economy, not government, is providing the revenue that makes tax cuts and a balanced budget possible. It gives us the historic chance to achieve long term financial reforms that can secure our children’s future. But our leaders are letting the moment pass.

Yes, of course, balancing the budget and cutting taxes are good things. Some of the proposals, such as reductions in capital gains taxes, actually will produce more revenue. Thus honesty requires me to say that if I were in Congress I probably would hold my nose and vote in favor of this mishmash.

But one of the benefits on not being in office is the freedom to tell the blunt truth. And the truth is that the tax cut deal will at once complicate our tax code and trivialize our rare economic opportunity. It will raise federal spending. And it will waste vast economic energy that otherwise could be employed in truly solving our entitlement spending problem and assuring struggling wage earners a bigger piece of the American pie.

The entitlement problems will reach a crisis about 2008. But when you hear the President and Congressmen boast about balancing the budget in 2002, you do not hear them bragging about how it can stay in balance to 2008 . Around that time the Baby Boomers start retiring, Medicare parts A and B go in the hole about $410 billion and Social Security will slip officially into the red by $84.5 billion. Between 2008 and 2040, as the aged population swells from 40 to 90 million, the nation will go one trillion dollars in the hole.

In the year 2040 my children will be about the same age as I am now. How old will your children or grandchildren be then? How do you expect them to manage the entitlement tax burden, let alone save for their own retirement? Do you think that a $500 child tax credit, spent upon receipt, or a deduction for a fraction of college costs (a new entitlement program sure to balloon in years ahead) is going to compensate them then?

There is a grim repetitiveness about human nature that shows what happens to peoples who stop studying history. In the economy, they start to think that several successive years of good times means good times forever. History, philosophy and folk wisdom have a different message. In the Bible, for example, the Pharaoh is warned by Joseph to use the “seven fat years” to store up grain for the “seven lean years.”

Acknowledging that neither human nature nor economic cycles have been repealed should lead us now–in the fat years–to simplify and flatten our tax code to provide stable growth. And we should start giving the poor and middle class–most of whom cannot save the money to get into the stock market –some hope of ownership of the means of production. That means joining Social Security and even Medicare to the private sector where high growth can provide rewards not possible under government alone. If the incentives of the proposed tax cuts were directed to those ends we could assure the solvency of Medicare and Social Security and give each worker a much bigger personal stake in sustainable prosperity. The tax breaks would fund each worker’s own savings, investment and retirement.

The alternative is short term or very limited tax breaks now and class warfare and conflict between generations later.

Both parties in Congress are responsible for the present policy myopia. While one at least can understand Republican Congressional leaders’ desire to avoid confusing the voters with long range complexities like Medicare and Social Security (which tempt the unions to massive false advertising at campaign time), it is sad that they cannot at least force a national debate.

A harsher historical judgment awaits the President. Bill Clinton doesn’t have to run again. He has had complete political latitude to be a statesman, and yet he opts for the kinds of problem-avoidance and goodies-dispensing that usually characterize politicians facing a tough re-election.

Is there a small sign of enlightenment in the tax bill? Yes, Sen. Joe Lieberman of Connecticut–the Republicans’ favorite Democrat–apparently has managed to get a provision into the act that would allow the $500 child credit to be saved like an IRA. My colleague Sam Beard (author of Restoring Hope in America, a guide to Social Security reform) estimates that if parents use it that way–each year to age 17–it eventually could become the basis of a long term college or retirement nest egg of over a hundred thousand dollars per child. Even the AARP and the unions do not oppose that, and it could start us back in the direction we need to go.

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.