Commentary

Republicans Go AWOL on Tax Cuts

By Gary L. Bauer and Stephen Moore
This article originally appeared in the Wall Street Journal.

Supply side and social conservatives are now equally baffled and angered by the congressional Republicans’ preemptive surrender on tax cuts this year. Rather than countering Bill Clinton’s State of the Union address—and its 1,001 little ideas for expanding government—the Republicans have responded with a total policy vacuum. After just three years in the majority the GOP is now in danger of becoming what the voters saw and rejected in the Democrats in 1994: a party devoid of ideas that simply preserves and defends the status quo in Washington.

The most prominent tax cutter on Capitol Hill these days is a Democrat, New York Senator Pat Moynihan. Although Moynihan’s Social Security reform plan has flaws—most notably expanding the taxable amount of the payroll tax from $68,000 today to $97,500 by 2003—the idea of reducing the payroll tax by two percentage points makes sense.

Moynihan understands what too few Republicans do: the tax burden imposed on American families is neither sustainable nor defensible.

The budget has been largely balanced not by downsizing the massive New Deal/Great Society social welfare empire that has been erected in Washington over the last thirty years, but rather by dramatically cutting the military budget in the post-Cold War era and by continuously ratcheting up taxes. This is not exactly what conservatives had in mind over the past two decades when they demanded a balanced budget.

Statistics taken from Bill Clinton’s own budget illustrate the point. Since 1987, the height of the Reagan Cold War military build-up, federal spending on national defense has fallen by $115 billion in 1998 dollars, or by one third. But over this same time period social program expenditures have soared by $328 billion, or almost 40 percent. The table below shows the dramatic reversal in budget priorities.

 
Defense Spending
Social Spending

1987

379
832

1998

264
1,160

1987-98

-115
+328

% Change

-30%
+39%

Republicans have controlled both houses of Congress now for 3 years, but there is not a single major domestic program—out of the thousands crammed in our $1.8 trillion budget—that has been eliminated by the GOP. This year Republicans won’t even bother to try to ax thorns in the side of conservatives for decades: the legal services corporation, the NEA, bilingual education programs, foreign aid, etc. Things have deteriorated to such a low point on Capitol Hill in recent weeks that a majority in the GOP now believes that it is better politics and economics to spend tens of billions of budget surplus dollars on a pork-barrel federal highway bill than to provide tax relief to working families.

Are congressional Republicans hopelessly unsympathetic to the tax squeeze felt by American workers today? In each of the past five years federal taxes have been rising at a faster pace than wages. The result: the federal tax burden on the American family is higher today than at any time since the end of World War II.

The Cold War is over. Reagan won. Yet American workers are still paying wartime tax rates. This is the first time in American history—dating all the way back to the Revolutionary War—that taxes have actually been raised, not cut, in the aftermath of a war. Last year’s tax cut gave back to taxpayers only one dollar for every five that were raised by Presidents Bush and Clinton. This year Senate Republicans have proposed a $6 billion reduction in taxes out of $100 billion expected growth in tax collections and out of total federal tax receipts of almost $1.8 trillion. This amounts to a 0.3 percent tax reduction. This is insulting.

For the past fifteen years Republicans in Washington have declared: we cannot cut taxes significantly until the budget is balanced. Fine. We now have a budget surplus. Still the GOP won’t advocate a tax cut worthy of the name.

In the recent past Democrats have successfully torpedoed GOP income tax cut proposals by labelling them as “relief for the rich.” One tax cut strategy that would promote employment and prosperity while giving meaningful tax relief to low wage workers, even those earning the minimum wage, would be to cut the payroll tax. The payroll tax has been the fastest growing federal tax over the past twenty years. More than 60 percent of American workers now pay more in payroll tax than federal income tax.

As Senator Moynihan (D-NY) has pointed out for years, the Social Security trust fund has already been plundered by roughly half a trillion dollars (currently at the rate of nearly $100 billion per year) to finance non-Social Security programs. The only way to truly prevent this annual raid on the trust fund—a raid that Moynihan has aptly described as “thievery”—is to make sure that Congress never receives this surplus money to squander in the first place.

Congress should belatedly take Senator Moynihan’s advice and cut the payroll tax immediately by one percentage point—from 15.3 percent to 14.3 percent. If budget surpluses continue to emerge as expected, the payroll tax could eventually be cut by at least another 2 full percentage point. The $1.1 trillion budget surplus projected by President Clinton’s own budget would fully finance this 20 percent reduction in the Social Security tax.

For a worker supporting a family on a $25,000 a year income, a 3 percentage point payroll tax would translate into a $750 a year tax saving. This family could use the tax saving however it wished: for education costs, for other family priorities, or for investment in a private retirement account. One political advantage of this tax cut is that it is invulnerable to the “class warfare” rhetoric. Lower income families would receive a larger percentage reduction in their taxes than higher income families because of the income cap on the payroll tax.

This plan would not adversely affect the Social Security trust fund. In return for the tax cuts, workers would be eligible for less growth in future Social Security benefits than currently projected. Instead of the scheduled 100 percent real growth, benefits would rise by 60 percent in the decades ahead. The good news is that even when the Social Security demographic deficit hits in 12 years when baby boomers start to retire, the payroll tax would never have to be raised as high as it is today. And current retirees would not see their benefits cut whatsoever as a result of the tax cut.

We also believe that such a tax cut strategy would create a political constituency for spending restraint and federal program terminations. Taxpayers would be on notice that spending cuts would translate into larger budget surpluses, thus accelerating the phase-in of the payroll tax cuts.

This proposal to use the budget surplus to cut the payroll tax rates and the future benefits of the Social Security program would not preclude moving toward a privatized system. As it happens, one of us supports retaining the present pay-as-you go structure of Social Security (Bauer), the other prefers the privatization approach (Moore).

But that debate is for another forum. What we, and hopefully all social and economic conservatives—the two essential pillars of the Reagan coalition—can agree on is that taxpayers should receive a dividend from the budget surpluses that are resulting from their own hard work. If Republican leaders refuse to promote this type of meaningful tax cut for American workers, then we are convinced it is time for new leadership.

Gary Bauer is president of the Family Research Council. Stephen Moore is director of fiscal policy studies at the Cato Institute.