Your Surplus Checks Aren’t in the Mail Yet

The House and Senate on Tuesday triumphantly produced a tax cut bill, pulling together moderates and conservatives in a miraculous legislative success. Predictably, President Clinton has vowed to veto the bill, and Al Gore energized a Democratic rally with the words: “So tell me again, what is the purpose of blowing the surplus on a huge gigantic risky tax scheme?”

From all the partisan rhetoric, Americans could be forgiven for thinking that they might actually get some money from the tax cut if the president signed it into law. But the amounts involved are so small over the next three years that no one will notice. Under the plan, taxpayers would see no change before April 15, 2002. And even that change would not be significant: For a taxpayer in the 28% bracket, taxes would fall to 27.9%, for a tax savings of $47 on a $65,000 income for a family of four. Gore’s view that a 0.1 percentage point tax cut three years from now is “gigantic” reveals, perhaps more than any other recent statement, his real attitude about tax cuts of any stripe.

The major provisions of the bill are so far off in the future that they are unlikely to happen. Taxpayers would see a 1 percentage point tax cut in all brackets in April 2010, when the current 39.6% bracket would become 38.6%, the 28% bracket would become 27%, and the 15% bracket would become 14%--well after the next president’s second term. The end of the marriage penalty would also occur in April 2010.

History is on the side of those who don’t expect to see these promised tax cuts. Since the inception of the tax code, Congress has rarely left taxes alone for a five-year period, and never for a decade. In 1989, the tax system was radically different from the way it is today, with rates for top earners at 31% and a far simpler system.

Why is Congress gambling on tax cuts that taxpayers won’t even begin to see until two years after the next elections? Because the $1 trillion in forecast surplus won’t appear until the early part of the next century, Congress feels rightfully reluctant to provide major tax cuts before it arrives.

But Congress has not extended this restraint to spending: It has designated as “emergency”--thereby avoiding previously agreed upon spending caps--$11 billion of spending on the decennial census, veterans’ medical care and the Federal Emergency Management Administration, and President Clinton is ready with increased spending on education, a new prescription drug benefit for Medicare and the environment.

Here’s how Congress could structure tax reductions to preempt a spending binge: Future surpluses could be matched to tax reforms today that have small current and high future costs. An example of such a tax cut would be a significant expansion of the Roth Individual Retirement Account, where retirement savings are paid for with after-tax dollars but are withdrawn free of tax. Since the money paid in today is taxed, the upfront costs are small. The interest is free of tax and the revenue consequences would only be felt in the future when savers retire and surpluses have accumulated.

Currently, the Roth IRA has a $2,000 annual contribution limit and is only eligible for taxpayers earning less than $150,000 (married) or $95,000 (single). Congress’ proposed tax-cut bill removes these income limits altogether, phasing in permitted contributions to $5,000 by 2005 and indexing them for inflation thereafter. Why not make this change immediate, instead of the bill’s other costly tax cuts--such as a tax credit for generating electricity by burning chicken manure--that reward special interests but not ordinary Americans? Expanding the savings plan now would give most taxpayers an immediate tax cut and provide them with an additional incentive to save without creating deficits early on.

In a time when the Congressional Budget Office is forecasting budget surpluses as far as the eye can see, yet Americans are still concerned about how to fund Social Security and Medicare, we owe it to the nation to give immediate tax relief that will provide incentives to solve our long-term problems. Expanding the Roth IRA, or similar savings vehicles would allow Americans to use funds that are rightfully theirs, and it would encourage them to look out for their future.