The US Tax-Cutting Battle Starts In Congress

Mike Godfrey, Tax-News.com, Washington

14 February 2001

As the highly complex Congressional legislative process begins to get to grips with President Bush's tax-cutting proposals, it seems that the Republican strategy will be to push through isolated elements of the proposals rather than trying to get the package passed in its entirety.

Speaking yesterday before the House Ways and Means Committee, Treasury Secretary Paul O'Neill said that passing some key elements of the package was the best way forward: "quicker is better, given the softness of the economy we're experiencing now." He wants Congress to pass the cuts in income tax rates and to double the $500 child tax credit, and to make these changes retroactive, in order to put money into circulation as quickly as possible. Chairman of the Committee Bill Thomas (R - California) said, "I don't think we ought to pause and clean our glasses and adjust our green eye shades before we respond to this economic slowdown."

Meanwhile Dick Armey (R - Texas), the House majority leader, was telling a press conference that he thought the House was likely to vote on reductions in income tax rates as early as March.

Democrats have been concentrating their fire on the uncertainty of the Treasury's surplus projections over such a long period as 10 years, and the need for an overall budget framework before they are asked to support cuts. They also say that the projected $1.6 trillion tax-cutting package can only get larger as it travels through Congress, and that retroactive cuts are the first evidence of this. To which Paul O'Neill responds that other parts of the package will be adjusted to accommodate the cost of retroactive cuts. He insists that 1.6 means 1.6: "The president has been really clear," he said. "I've heard him say it over and over again. The number is $1.6 trillion."

One important factor inclining the Republicans towards a 'divide-and-conquer' approach is the likely opposition to repeal of estate tax (the 'death' tax) which forms a large part of the package but is strongly opposed by most Democrats and even some Republicans.

Even many wealthy people oppose ending estate duty, and a petition to Congress against the measure which will be published next weekend has been signed by 120 rich Americans including George Soros, David Rockefeller Jr., Steven C. Rockefeller, chairman of the Rockefeller Brothers Foundation, and Ben Cohen, a founder of Ben & Jerry's.

The petition has been organised by William H Gates (Bill Gates's father). He says that "repealing the estate tax would enrich the heirs of America's millionaires and billionaires while hurting families who struggle to make ends meet." Most of those who have signed the petition are Democrats.

Warren Buffett, who supports the petition but has not signed it, said in the New York Times that repealing the tax would be equivalent to "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."

The 10-year cost of repealing the estate tax is estimated to represent about one sixth of the whole tax-cutting package, although this is disputed by Democrats, who say it will be far higher.

One of the key oracles in this drama, Alan Greenspan, also chipped in yesterday. Testifying before the Senate Banking Committee, Mr. Greenspan said tax cuts could be helpful in the unlikely event that the nation was entering a prolonged recession, but emphasized that he saw the current problems as just a blip.

"It is most unlikely that if we go through a regular recession that any tax cut can be enacted sufficiently quickly to alter the probability of whether we will, indeed, find ourselves in a recession," he said.

So there was a lot of talk yesterday - but some action as well, when the House overwhelmingly passed a bill that ring-fences surpluses from the Social Security and Medicare trust funds, allowing them to be used only for debt-reduction, until both programs have been extensively overhauled. $2.9 trillion of the total projected surplus of $5.6 trillion comes from the two social funds.

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