1/23/01 5:15 p.m.
The Tax-Cut Two-Step
And why it won’t work.

By NR’s John J. Miller & Ramesh Ponnuru

he arguments against tax cuts are getting more and more strained. Take Steven Rattner's op-ed on "Tax-Cut Mania" in today's Washington Post. We're not supposed to cut tax rates, he writes, because the surpluses might not last: We have to take account of "the eventual impact of slower growth on tax revenues." Then Rattner explains that we should opt for "less tax relief now but perhaps more later as significant surpluses begin to kick in." Huh? Economic projections change, sure, but in the span of three sentences? We don't need to cut taxes, Rattner argues, because the Fed is already on the case, cutting interest rates. A few months ago, of course, the reason we weren't supposed to cut taxes was that the Fed was raising interest rates (thus showing that the economy was in danger of "overheating," a danger that tax cuts would increase).

The argument against the Bush tax cut is beginning to boil down to a collection of adjectives: "huge," "massive," etc. Never mind that Bush's tax cut is much smaller, as a proportion of the economy and of the budget, than Reagan's or Kennedy's. Never mind, as well, that Bush's tax cut basically keeps tax rates stable as a percentage of the economy: If it isn't passed, tax rates will rise, thanks to the phenomenon of "real-income bracket creep." As people get richer, they move into higher tax brackets. Without any legislation, then, average tax rates rise as incomes grow.

Nevertheless, some Republicans are nervous about passing a "huge" tax cut. That's the major reason for the proposals to break up the tax-cut package. Speaker Denny Hastert believes that Congress ought to pass a bill reducing the marriage penalty and ending the estate tax, which would have bipartisan support, before tackling rate reduction. Some social conservatives who campaigned on ending the marriage penalty, rather than on rate reduction, agree with him. The White House, however, fears that the second part of Hastert's plan would never happen. Democrats would say that they had already cut taxes.

A few conservatives have argued for reversing Hastert's plan: pass the rate cuts first, and later take up the marriage penalty and the estate tax. This strategy would let Republicans make a clean economic argument for the rate cuts while reducing the total size of the bill. The estate-tax and marriage-penalty provisions, meanwhile, are sufficiently popular that they would pass themselves.

This strategy has its flaws, too. For one thing, some social conservative congressmen won't stand for a delay on the marriage penalty. This can be finessed: A tax-rate cut can be structured in a way that eliminates the penalty. Abolishing the estate tax, however, poses a more difficult problem. If action on the estate tax is delayed, a formidable coalition will have time to mobilize to keep it — including estate planners, insurance companies, universities, and charities, all of whom benefit in one way or another from the tax. They didn't need to mobilize when they could count on Clinton to veto any repeal. Now they will. Does a president who advertises himself on compassionate conservatism really want to take on every charitable foundation in the country?

A two-step process, then, probably doesn't make sense however the steps are ordered. Republicans have two real choices: Either try to pass the full tax cut now, or give up on some of its provisions for the year and pass a smaller bill. If they take the latter course, they need to figure out what are the most important tax cuts to keep. Our vote's for rate cuts.