Thinking differently

The budget debates that have occurred over the past two years -that is, since the surplus has gone from being a possibility to a reality-are forcing everyone to think differently about what can happen. The old politics of the budget are quickly giving way to some new ones that are very surprising.

For example, proposed across-the-board cuts in personal income taxes that many long championed have now repeatedly failed to get much support. The negotiations between the President and Congress that were always a standard part of the budget debate now appear to be optional at best. And using the surplus to reduce the national debt, which for decades had been thought to be the least likely of the three alternatives, now has become the preferred policy for many Representatives and Senators.

That is why, if a tax cut is the appropriate fiscal policy, it may be time to start thinking seriously about something other than individual income tax cuts. Instead, it may be appropriate to consider something that for nearly two decades has been dismissed out of hand by everyone involved in the budget debate -eliminating the corporate income tax.

The last time this was even mentioned by an elected official was in the early 1980s, when President Reagan made an off-hand remark to the effect that there was little reason to tax corporations. This enormously popular, extremely charismatic and highly effective communicator was immediately skewered politically for even suggesting such a thing. Since then, virtually no one in Washington has dared broach this subject-thinking that if Reagan could not talk about it, they certainly were not going to try.

But the world has changed dramatically since then. When Reagan made his remark, less than 20 percent of U.S. families owned stock, and the assumption that only fat cats would benefit if corporate income taxes were cut back or eliminated seemed to be correct.

Today, close to 50 percent of families own U.S. equities in some form. This means that while the wealthy would certainly benefit if corporate taxes were eliminated, so would many people who are not rich.

Even more important is the reason that many people own stock today-retirement. While day traders and professional investors do trade continually, these days more people than ever before are buying and holding their shares to prepare for the future.

Eliminating corporate income taxes would substantially increase the profits earned by many companies. That, in turn, would likely significantly increase the price of the stock. And that would cause a dramatic and virtually immediate increase in the value of the retirement portfolios of many average Americans. For the baby boom generation that is wondering if it will have to flip burgers to make ends meet after retirement, this might very well be the easiest way for the government to provide added economic security.

One of the most interesting aspects of this proposal is that it would almost certainly have to be made by a liberal-to-moderate Democrat to be taken seriously. In spite of the economic and demographic changes that have occurred since the early 1980s, a Republican proposal to eliminate corporate income taxes would likely be considered to be too reminiscent of what Reagan proposed and would again be dismissed. A Democrat making a similar proposal not only would raise eyebrows all over Washington, but would immediately and completely change the political landscape.

One of the keys to making this happen would be the labor unions, which would have to see eliminating the corporate income tax as being in their interest. But in another example of thinking differently, the unions might not be as opposed as the history of the last 20 years might indicate. Union pension funds, which hold a good deal of stock, would benefit as well if the markets rose because of increased earnings. In addition, less money being paid to the government might easily be translated into demands for increased hiring or higher wages.

Such a proposal would also dramatically transform Washington. The lobbyists who work hard to obtain or protect a corporate tax break no longer would have anything to do. The Joint Committee on Taxation would have a substantial part of its work eliminated. The House Ways and Means and Senate Finance Committees would similarly find that their jurisdiction and power had been diminished. And smaller role for lobbyists would probably mean fewer political contributions.

There would, of course, be some substantial costs in making this happen. For example, using the surplus to offset the impact of eliminating corporate income taxes most likely would mean that interest rates would be higher because the national debt could not be reduced by as much. Of course, that assumes that the surplus would not have been used for any other purpose and instead would have been totally devoted to reducing government borrowing.

Will any of this happen? Probably not. The challenge of explaining how much the world has changed since Reagan may just be too difficult to overcome. But the surplus-along with the many changes in the economy that have helped create it-at least now allows policies like the elimination of the corporate income to be considered seriously for the first time in decades. That is a very liberating concept for a debate that has been stuck on reducing the deficit for most of the past 50 years.

"Budget Battles" Budget Countdown

As of today there are 68 potential legislative days until the start of the coming fiscal year. If Mondays and Fridays, when Congress frequently does not conduct legislative business, are excluded, there are only 43 potential legislative days left.

None of the fiscal 2000 appropriations have been passed by either the House or the Senate.

Question Of The Week

Last Week's Question. A number of fascinating answers were received to last week's question, which asked "If there are laws of nature and science, what are the laws of budgeting?" An "I Won A Budget Battle" T-shirt goes to Leighton Ku of the Urban Institute, who came up with a budget law that is related to something called the Heisenberg Uncertainty Principle: "The more that all parties understand the contents of a budget bill, the less likely it is to be passed." A T-shirt also goes to Jeff Davis of the Legislative Services Group, who stated "Ten-year economic forecasts are as reliable as ten-year weather forecasts."

This Week's Question. One of the biggest budget stories of the year will happen in the next week or so when the Congressional Budget Office releases its estimate for April revenues. Here's your chance to play budget prognosticator. What will CBO say is the total revenues collected by the federal government in April 1999 from all sources. FYI... The government collected $261 billion in April 1998. Send your estimate to scollender@njdc.com. If there is more than one correct answer, the winner of the "I Won a Budget Battle" T-shirt will be selected by random drawing.