Targeted tax cuts: Do they make dollars or sense?

Throughout the presidential campaign, candidates Clinton and Gore maligned the Dole-Kemp 15 percent across-the-board tax cut as a "tax scheme." Clinton used the term seven times in Hartford; Gore roughly eight times in his debate with Jack Kemp. And in the final debate in San Diego, the President uttered the phrase three times.

Beneath the debate hall klieg lights and on the trail, the Clinton-Gore team painted the plan as something sinister, something risky -- and, as we heard time and again -- something "that would blow a hole in the deficit."

To be sure, the disparaging remarks were the stuff of sound bites. Polls showed that the Dole-Kemp tax cut didn't resonate with voters. Just two weeks before the election, pollsters found that support for the plan had eroded; forty-six percent of those polled opposed the tax cut after warming to it in August.

In place of across-the-board cuts, Clinton and Gore supplanted their own plan: "targeted tax cuts" covering higher education, first-time home ownership and the family. The Clinton targeted tax cuts, which would cost $152 billion over six years, include:

a $10,000 tax deduction for college tuition;

a $ 1,500 tuition tax credit for community colleges;

a $500-per-child tax credit; credits to businesses that hire people off welfare; and,

miscellaneous credits such as tax cuts for small businesses that set up pensions for their workers.

Taken individually, there is a sound argument to be made for any of these ideas. Tax incentives for education recognize that education is no less a capital investment than building a new factory. Child tax credits help relieve the growing burden of the tax system on families. We recognize elsewhere (see "Tax credits: The key to effective compassion", page 1) the effectiveness of tax credits as an instrument of welfare reform.

What's the problem then? There is an important distinction between across-the-board tax cuts and "targeted" tax cuts. An across-the-board tax cut reflects the idea that certain money now collected by government is best left for the taxpayer to spend as he chooses. A targeted tax cut reflects the idea that government needs to collect certain money in order to bring about a result intended by government that the taxpayer could not by himself achieve.

The question, then, is which purpose concerning the use of the taxpayer's money is more important, the taxpayer's or government's.

An across-the-board tax cut enables the taxpayer to spend as he chooses.
Of the tax incentives in the Clinton plan, the ones that raise the most concern are those for higher education. The CPI for higher education has been rising at an annual rate of 8.64 percent for the last five years, 5.52 percentage points faster than the overall CPI. The concern is that, by throwing more money at higher education, the federal government will simply escalate costs and tuition.

An across-the-board tax cut might produce better results. We used our BHI tax model to determine how a 15-percent across-the-board tax cut would affect the Massachusetts economy. We found that this tax cut would create 112,307 new jobs, increase state payrolls annually by $8.03 billion, bring about $5.5 billion in new capital spending and annually bring in an additional $478 million in state tax revenue.

Targeted tax cuts can, if judiciously selected, serve a legitimate public purpose. Against this purpose, however, it is necessary to weigh the equally legitimate purpose that can be achieved by putting the taxpayer back in control of his own money.

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