TIME: Almanac 1995

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<text id=93TT0210> <link 93TO0125> <title> Aug. 16, 1993: Who Will Feel The Pain? </title> <history> TIME--The Weekly Newsmagazine--1993 Aug. 16, 1993 Overturning The Reagan Era </history> <article> <source>Time Magazine</source> <hdr> COVER STORIES, Page 25 BUDGET Who'll Feel The Pain? </hdr> <body> The budget will cost most people only 10 cents a day in new taxes--but some may pay with their job By DAN GOODGAME/WASHINGTON--With reporting by Bernard Baumohl/New York and Adam Zagorin/Washington Bill Clinton vowed, from last fall's campaign until last week's televised address to the nation, that his presidency would mean "no more something for nothing." Yet for the vast majority of Americans, the Clinton budget that Congress passed last Friday promised to deliver the next best thing: reversal of the dangerous, decade-long growth in deficit spending, at the bargain price of only 10 cents a day. That's what the average family will pay for the modest new 4.3 cents-per-gal. gasoline tax--the only measure in Clinton's budget that imposes any direct cost on 90% of Americans. The new income taxes hit only the 1.2% of American families earning more than about $180,000 a year. The new tax on Social Security benefits affects only the wealthiest 13% of retirees. And the most impressive-sounding spending cut--$56 billion over five years from the Medicare program of health care for the elderly and disabled--merely shores up one corner of the nation's fastest growing sinkhole for taxpayer dollars. Medicare spending, expected to grow $328 billion over the next five years, will instead grow only $272 billion. That's what passes for a "cut" in federal budgeting. Though Republican lawmakers and conservative talk-show hosts have succeeded in frightening many Americans--67% in the latest TIME/CNN poll--into the mistaken belief that the middle class will bear the brunt of Clinton's new taxes, the President and his party have taken pains to insulate all but the highest-paid Americans. Representative Jim Slattery, a conservative Democrat from Kansas, says he was reluctant to vote for new taxes until he realized that "unless you earn more than $180,000 a year, you won't get hit." That all sounds nicely progressive. But cutting the deficit has effects on the average citizen that reach far beyond simple taxation. The biggest risk for most Americans is that, though they will probably owe no more to the IRS next April 15, some may have to pay with the loss of their job. Warns John Makin, a budget expert at the American Enterprise Institute in Washington: "To assume that the pain will be confined to the so-called rich is absurd. A large share of so-called wealthy families own small concerns in the service sector, which creates virtually all growth in jobs." To see how this works, one need only visit proprietors of some of the hundreds of thousands of small businesses whose hiring policies are affected by the new taxes. John Higgins, president of North American Aerodynamics, a parachute manufacturer in Roxboro, North Carolina, says the hike in corporate taxes, from 34% to 35%, may compel him to cut his work force or lose business. "I'm bidding against the Koreans, the Mexicans, you name it," Higgins says. "I've lost business because I came in 3 cents more on an item. If I'm having to pay more for taxes or health-care benefits, how can I keep my bids on par? It's not just me and my livelihood. It's the livelihoods of those people I won't be able to hire, and the products I won't be buying from other small-business owners." In the same fix are Gerardo and LuAnn Perez, who own a McDonald's restaurant near Sacramento, California. "However much more we pay in taxes, whether it's $10,000 or $20,000," says LuAnn, "it's one more employee I'm not going to be able to hire. It's money that I would have invested in the stock market or spent on equipment." The restaurant typically employs between 45 and 60 people, but the owners are determined to scale back, not only because of higher income taxes but to remain under the threshold where they must comply with the family leave bill and other new regulations and fees, possibly including payroll taxes expected as part of Hillary Clinton's health-care reforms. Bill Clinton claims that the solutions to these employment problems lie within the budget enacted by Congress last week, though his advisers concede that it still represents a huge gamble on an untested economic theory--one that, ironically, was considered Republican dogma before Ronald Reagan and again during the Bush Administration. The idea is that raising taxes and cutting federal spending, which normally would shrink the economy and worsen unemployment, will have an entirely different effect on an economy burdened by interest payments (now running at about $200 billion a year) on a fast-rising federal debt. With a reduced annual budget deficit, the total demand for credit will ease up, allowing interest rates to decline. That, say the Clintonites, will save families and businesses so much money, in lower payments on mortgages and other debt, that it will fully offset the "fiscal drag" exerted on the economy by federal tax hikes and spending cuts. Laura D'Andrea Tyson, chairwoman of the President's Council of Economic Advisers, calculates that each drop of 1 percentage point in long-term interest rates saves the U.S. economy between $50 billion and $66 billion. That would be enough to counteract the budget's estimated $50 billion drag, mostly from tax hikes, in 1994. In kitchen-table terms, a family with a $50,000 income that refinanced its 30-year, $100,000 mortgage from 8.5% to 7.5% would save about $70 a month. That would more than cover the $10 a month the family will pay in extra gasoline taxes and taxes passed along by corporations. In political terms, the 1.4 million taxpayers who will be soaked by higher income taxes are dwarfed by the 20 million families of the working poor who will get a tax cut--and encouragement to choose employment over welfare--through Clinton's expansion of the Earned-Income Tax Credit. Clinton's lobbyists on Capitol Hill cited examples like these to convince balky lawmakers that, as Tyson says, "the benefits of this budget outweigh the costs in every district in the country." Still, many lawmakers in both parties were unpersuaded. "Of course this plan will cost jobs," said Representative Robert Andrews, a New Jersey Democrat who voted against the budget. "The tax increases are going to decrease investment and dampen economic activity." One of Clinton's core arguments is that his policies have already had a positive effect on interest rates. Ever since his election, and well before his budget passed into law, long-term interest rates had fallen more than a percentage point to record lows, a benefit that his partisans attribute to financial markets realizing that the President and Congress were serious about deficit reduction. But other economists, especially conservatives, scoff that the lower rates merely reflect investors' expectations that Clinton's new taxes will drive the economy back into recession. Republican lawmakers predicted that the budget's new taxes would "destroy" between 1.7 million and 2.5 million jobs by 1997. Lacy Hunt, chief economist for CM&M, a Wall Street brokerage, warns that the budget "will shove the economy into recession by the end of 1994. We've had significant tax increases under Eisenhower in the 1950s, Johnson in the 1960s and Bush in 1990. And within 18 months of all those tax increases, the economy slumped into recession. Now we have the biggest tax increase in history at a time when the economy is already fragile." Both Hunt and Philip Braverman, chief economist for DKB Securities, say low interest rates offer little stimulus when manufacturing companies are slumping and reluctant to borrow at any price. Other critics predict that Clinton's new income taxes will collect far less revenue than predicted because wealthy individuals will instruct accountants and lawyers to reclassify income--subject to the top 39.6% rate--as capital gains, taxed at 28%. Daniel Mitchell of the conservative Heritage Foundation also worries that investors will be encouraged to avoid the risks of funding new high-tech, job-creating companies--what he calls "the Microsofts of tomorrow"--and to move toward tax-free municipal bonds. Even some Administration economists worry about the heavy reliance of Clinton's economic strategy on continued low interest rates, because those rates can be pushed up and down by many factors other than expected federal borrowing. Even if the deficit-reduction plan works as planned--a big if, given the history of other such efforts--interest rates could be pushed up by the behavior of foreign economies, investors and armies. Any major unrest in the Middle East, for example, could drive up oil prices and interest rates. Allen Sinai, chief economist of Boston Co. Economic Advisors Inc., warns that if interest rates rise above the levels in White House models, the fiscal drag from tax hikes and spending cuts "could depress economic growth well beyond the next presidential election." In the end, however, many economists, like many average Americans and foreign leaders from Tokyo to Bonn, believe that the Clinton budget, for all its costs and risks, is, in Sinai's words, "simply the price we have to pay for getting our house in order." Clinton inherited an unprecedented fiscal mess in which federal debt was growing faster than the economy, a trend that obviously could be neither sustained nor ignored. Former Senator Paul Tsongas of Massachusetts, who derided Clinton as "Pander Bear" during last year's Democratic primaries, gives the President high marks for "courage" on the budget. Tsongas says he wishes that the budget included more spending cuts and higher energy taxes but adds that "if they hadn't passed it, I would be very concerned about the reaction of the markets." Deputy Treasury Secretary Roger Altman notes, "The one thing we know Americans will not stand for is doing nothing." Retiree Bea Rieckhoff, 60, of Milford, Illinois, agrees that while new taxes on Social Security benefits "bother" her and her husband, "we have children and grandchildren, and we have to do something about the deficit. I don't want them to have to pay off debts that we left them." Trouble is, as Clinton conceded last week, this budget only starts the job of cutting the deficit. It still allows spending to rise, from $1.5 trillion this year to $1.8 trillion in 1998. And unless runaway spending on Medicare, farm subsidies and other entitlements is cut, along with upper-middle-class tax breaks such as the home-mortgage deduction, the deficit will turn back up after 1997. This budget is, as Ross Perot put it, "a bridge built halfway across the river." But halfway is farther than anyone has gone before. </body> </article> </text>