A TAXING DEBATE

July 21, 1999
		Leaders in the U.S. House of Representatives delayed a vote on a possible $800 billion tax cut today. Three experts discuss the debate in the House and the future of the GOP tax plan. EDITOR'S NOTE: The House adopted a slightly modified version of the $792 billion tax cut on Thursday. The final vote was 223 to 208.

March 3, 1999 Putting Social Security money in the stock market. Feb. 16, 1999: Republicans propose a 10% tax cut. Feb. 1, 1999: President Clinton sends his budget -- with $117 billion in surpluses-- to Congress. Oct. 21, 1998: Rudolph Penner and Robert Reischauer to discuss the details of the 1999 budget. April 15, 1998: Debating tax code reform on tax day. June 9, 1997: Congress considers federal tax reform. July 1995 Rep. Dick Army's (R-Texas) flat tax outline. Jan. 17, 1995: Congress discusses the possibility of a flat tax system. The Online NewsHour Special Report on Social Security Reform.   The White House The United States Senate The House of Representatives	JIM LEHRER: Joining us now Robert Greenstein, executive director of the Center for Budget and Policy Priorities in Washington; Lawrence Kudlow, chief economist at American Scandia, Incorporated, a Connecticut-based financial services firm and a former budget official in the Reagan administration; and Congress watcher Norman Ornstein of the American Enterprise Institute. First, Norm, on the House problem, why can't the Republicans get their own folks to vote for this?
	"Dollars and direction"
	NORMAN ORNSTEIN: There are two problems here, Jim: dollars and direction. First is the dollar amount. A number of the more moderate Republicans are concerned for the same reasons that some of the Democrats in the Finance Committee were expressing that this is too much, that if you commit to $800 billion, over 10 years in tax cuts, the directed surpluses might not be there, but also something else will give. They'll end up committing more in Medicare than they had suggested. There are substantial additional commitments that had been promised in defense and even in education, and in the rest of the discretionary domestic budget there will be more spending and then once you've done the tax cuts, it won't be there. JIM LEHRER: Well, we'll get to all of the details in a moment. I mean, politically why can't they get these folks to understand -- I mean, the House speaker is -- Mr. Hastert for the first time is exercising a lot of leadership, trying to get his folks to go. But why is it not working? NORMAN ORNSTEIN: They have a very small margin, so they have almost no room for error, and, remember that most of these are moderates who come from districts that respond to, in effect, a public that basically is saying overall it wants more Medicare, rather than more in tax cuts. In those districts they're vulnerable, those Republicans, to this kind of a plan. What the Republican leadership wants to do is to secure its base. But for the moderate Republicans who are vulnerable they're less worried about their base than their overall nature of their district. And they're not all that inclined to support the speaker in many cases. These are people who went to the speaker and said give us a vote on campaign reform a while back in the summer and who said no to them. So now he's coming back and saying he needs something when they didn't get what they wanted. JIM LEHRER: You know, we still have the whole evening ahead of us, and they're still trying to work this out. Do you think they probably will before the evening is out? NORMAN ORNSTEIN: They've been working desperately to try and secure these votes. And what they've been trying to do basically is to provide a fig leaf for these Republicans who are worried about the death by giving them at least some kind of a vote that would suggest -- although it will be more symbolic than real - that if these surpluses don't turn out to be as large as they have been, that they won't go for the tax cuts in quite the same way that they'll move towards reducing the debt. At the time we started the broadcast they were still at least two or three votes short, and we'll find out later tonight. They aren't going to vote on this, the Republican leaders, if they don't have the votes secured. JIM LEHRER: They're just going to wait until they do get the votes. NORMAN ORNSTEIN: They're not going to vote on this if they end up being embarrassed by a setback.
	Whose surplus is it, anyway?
	JIM LEHRER: Certainly. Okay. Well, let's go to the basic issue here. Larry Kudlow, you support the Republican plan, the Archer plan, do you not? LAWRENCE KUDLOW: I surely do. JIM LEHRER: And why? LAWRENCE KUDLOW: Well, for one thing, I -- the issue here is almost a political watershed issue in economic terms, whose surplus is it, whose money is it? Whose money is it? As an old budget hand, the argument I'd make is this is not a surplus born of budget downsizing the way the private sector has been downsizing for the past 20 years. This is a surplus created by a prosperous, hard-working, entrepreneurial, high-tech economy. And basically, it's a revenue surplus, not really a budget surplus. And that is why I strongly believe that that revenue surplus should be turned over to the working men and women in the private sector who have created this prosperity in the first place -- they're the real heroes of the past 15 or 17 years -- and provide them with additional tax freedom to continue, maintain and nurture this prosperity well into the 21st century, to keep our technological advances, the leadership of the world. And most importantly, I believe as a free market economist that ordinary men and women will save, invest, spend, and risk their money more wisely than the government will. And in that sense, this is going to be a watershed issue. I think Mr. Archer deserves high praise for putting it on the table. And I'm afraid I disagree with my friend Norman Ornstein. I believe it is going to pass, and I also believe the Senate tax bill for Mr. Roth will fall short of the House bill, but in conference, it will move towards the House bill. And I think the issue of whose money is it will persuade large numbers of Democrats to support a large tax cut before this year is out. JIM LEHRER: Robert Greenstein, let's go back through some of these things. First of all, do you agree with Mr. Kudlow that this is a economic watershed issue? ROBERT GREENSTEIN: I think this is a critical economic issue. And I think if we go the route of the big tax cut, we'll injure the economy. JIM LEHRER: In what way? ROBERT GREENSTEIN: Well, the first key thing here, Jim, is there isn't a big surplus to spend on a tax cut. Let's look at this surplus. The bulk of it is money in the Social Security Trust Fund that's building up now to pay for the baby boomer's retirement when they retire. There supposedly is a trillion dollars in surplus over ten years outside of Social Security. That's supposed to be what funds the tax cut. The trillion dollar forecast is based on two assumptions, neither realistic at all. The first is that the Congress will agree to cut over the next ten years $600 billion below today's levels, adjusted for inflation, for the part of government that includes everything from defense to education to FBI to the environment. Neither party can pass bills that include those cuts, neither party intends to. Everybody knows those aren't going to happen. Secondly, the forecast assumes we'll have zero emergency spending for the next ten years. No floods, no hurricanes, no tornadoes, no Kosovos -- nothing. If you adopt the more realistic assumption, it will simply keep the current level of expenditure for this broad part of the government at today's level adjusted for inflation, a realistic assumption, plus Republican leaders want to increase defense, want to increase aviation spending and increased highway spending last year. If it simply stays at today levels adjusted for inflation and emergency spending stays at the average level of recent years, excluding things like Desert Storm and last year's emergency spending binge, then only about $125 billion of this $1 trillion is left. If we give away $800 billion in a tax cut, either there will be extremely deep cuts in other basic functions, which won't happen because neither party can pass them, or what will really happen, we're going to bring back deficits outside of Social Security. There's no trillion-dollar surplus in the bank. None of it, not one dollar has yet materialized. Let's see what really materializes. If it really materializes, we can talk about a Medicare benefit, we can talk about some tax cuts, we can talk about education. Nothing of it has materialized yet outside of Social Security. And that's off limits. LAWRENCE KUDLOW: It's not the government's - JIM LEHRER: Mr. Kudlow. LAWRENCE KUDLOW: Yes. Jim, it's not the government's money to "give away" in the first place. I just marvel at that rhetoric. It's the taxpayer's money. It's working Americans' money, not the government's money. The second point I want to make is insofar as these baseline estimates are concerned, I can make a case that they're actually too low, not too high. That is to say, both the Congressional Budget Office and the Office of Management and Budget is still predicting that economic growth in the next decade will be less than 2.5 percent per annum, per year. Look, there's a history here. Since World War II, the U.S. economy has grown at 3 percent per annum. And that covers over 50 years. Since the early 80's when this long wave of prosperity was started, we've been growing at over 3 percent, and since the tax cut package of 1997, the last three years, we've been growing over 4 percent. So a more reasonable economic assumption would yield higher revenues, and then there's the whole issue of the estimating procedures. You know, last year Bob Greenstein and others argued - JIM LEHRER: I think you're going to -- people have to understand what you're saying. What you're saying essentially is that Robert Greenstein is wrong, that these are real. It is a real surplus. That's what you're saying? LAWRENCE KUDLOW: As long as government obstacles to prosperity aren't created, these are as real as any estimate is. I will side with the late Friedrich Hyack -- long-term forecasting is a fatal conceit. But this is the way the game is played. And my point is a simple one. If we're going to play this long-term game, five and ten, twenty-year projections for that matter, let's use American History as the guide, not some outdated models from Cambridge, Massachusetts, or Washington, DC. We've been growing at 3 percent. Actually, the growth has picked up to over 4 percent. Productivity continues to be underestimated. Our technology economy is throwing off tremendous advances in productivity and worker real wages. So what I'm saying is there's actually more resources, not just to reduce tax rates, but also to solve the Social Security system and to solve the health care system. And let me just say, there's nothing we could do better for Social Security solvency and health care improvement than the Archer tax proposal. He's going to make health care tax deductible, have individuals on the same playing field as businesses so it's pretaxed income. That creates consumer choice and competition. That's going to really improve the insurance customization of plans. And secondly, Social Security needs higher real wages, higher productivity, and better growth. Tax cuts will increase growth. You know, Bob Greenstein says this will slow the economy. Bob, are you a Keynesian? Keynesians never argued that. Are you a supply sider? Supply siders never argued that. Since when do tax cuts limit growth?
	Can the debate be resolved?
	ROBERT GREENSTEIN: The fact of the matter is that the Federal Reserve Board raised interest rates last week because it thought the economy was at risk of overheating. If we pour lots more money into the economy, either through a big tax cut or for that matter big spending increases, the Fed will probably respond by tightening interest rates further. In addition, you know, we've got to again look at the point. Let's not get into a big debate on future growth rates. The fact of the matter is, whatever the growth rate, this money isn't here yet. It only shows up if cuts are made that the Republican Congress, not just Democrats, are flinching from making. Jim, today the House cancelled action on an appropriations bill on big domestic programs because to fit within the spending constraints they have assumed to make room for their tax cut, they'd have to do cuts that the Republican leaders flinched from making. Everyone knows they aren't really going to make those cuts. And beyond this, if you talk about if we did do a tax cut of this nature, where the benefits go, the House package, if we're going to do a tax cut, and I think we ought to wait to see if the surpluses materialize -- there's no need to rush, especially since if we rush now the Fed might respond by raising interest rates anyway. But if and when there is money for a tax cut among other needs, let's at least do it in an equitable fashion. The bill on the House floor would provide - you know - JIM LEHRER: I think we have the just of where the two of you disagree. Norm, back to you. LAWRENCE KUDLOW: The Fed's not going to cut -- the Fed doesn't have to raise interest rates, Jim. The dollar is so strong. King dollar is the strongest currency in the world. I don't believe any of that stuff. Alan Greenspan is not - this is just this odd thing where defenders in Washington, defenders of the government, defenders of domestic spending will go to any length to subvert good economic theory and come up with these concoctions that we can never cut taxes. I say it's very simple. Rejuvenate economic incentives. Create the incentives for technological advance. Create incentives for stay-at-home parenting. Create new incentives for health care, create new incentives for IRA's and 401(k)'s and the 100 million people who own stocks. This is a leadership issue. And I'm so happy that today finally the Republican Party looks like it's coming together. Steve Forbes on the presidential campaign trail has endorsed-- JIM LEHRER: Mr. Kudlow, sorry. LAWRENCE KUDLOW: --And he's the only one who has done it. JIM LEHRER: Right. That's another whole issue. I have great incentive. The clock is running here and I want to go back to Norm. Is this -- is this something that has to be resolved? I mean, whatever the Republicans want or whatever the President wants - the President says he's going to veto whatever the Republicans pass if it, in fact, passes. Is this an issue that can be kicked into the year 2000 election campaign, or does it have to be resolved now? NORMAN ORNSTEIN: Well, it could in the end be kicked into the 2000 campaign, because they can't reach an agreement. A couple of interesting things here: The debate in Congress, the debate in Washington realistically is not the one between Bob and Larry -- no tax cut, $800 billion in tax cut. Democrats are calling for a tax cut. The question right now is will it be a 250 or 300 billion dollar tax cut which is what most of the Democrats are calling for, the White House and the Congressional Democrats, or an $800 billion tax cut, or will they cut the difference in between -- or can they come to an agreement at all - because there may not be a coalition in the House and Senate for doing this. And what's interesting as well is the Senate proposal, the Senate Republican proposal is radically different from the House Republican proposal. The proposal that Larry Kudlow supports ardently is one that is built around that 10 percent across-the-board reduction in marginal tax rates, which gives a much bigger reduction for the wealthiest taxpayers. JIM LEHRER: That's not in the House -- I mean in the Senate - not in the Senate. NORMAN ORNSTEIN: The Senate proposal tilts that tax cut much more heavily towards lower and middle income people, which is why some of the Democrats support it a little bit more, and moves much more towards incentives for savings. So the Senate and House Republicans haven't gotten their act together except on amounts here. And we've got a long ways to go. And at the same time - JIM LEHRER: That's my point. There's a long way to go. NORMAN ORNSTEIN: A long way to go, and at the same time, the appropriations bills aren't going anywhere with the deadline kicking in there, so - JIM LEHRER: We have to go, gentlemen. I know all three of you have a lot more to say. And there's a lot more time, but not tonight. Thank you.

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