The Common Man's Tax Cut

By ALEX PRUD''HOMME

"The most irresponsible idea of the 1990s," said Budget Director Richard Darman. "A charade!" harrumphed President George Bush. "Outrageous!" cried dozens of editorialists and labor groups. The object of that opprobrium was Senator Daniel Patrick Moynihan's plan to reduce the Social Security tax. First proposed by the New York Democrat in December 1989, the bill was killed last October before it even reached the Senate floor. Today, however, the Social Security Tax Cut Act of 1991, an updated version of Moynihan's idea, is becoming one of the country's most hotly debated domestic policy issues.

With his plan, Moynihan seeks to curtail the government's spending of the surplus that resulted from a 1983 congressional overhaul of the Social Security system. Congress had called for accelerated tax rates to build up reserves for baby boomers, many of whom will begin to retire early next century. The reserves will result in an estimated surplus of $74 billion this year, $83 billion next year and $225 billion by the year 2000. Charging the government with "extortion," Moynihan claims that this "trust fund" is being improperly counted as general revenue when the federal budget is written each year and is being used to mask the real size of the budget deficit. Besides, Moynihan contends, the Social Security tax is one of the country's most regressive levies, putting a greater burden on middle- and low-level earners than does the income tax. "It's time the American worker got a break," he says. "Average weekly earnings for non-supervisory, nonfarm workers were lower in 1990 than they were in 1960."

Under the existing law, American employers and employees this year will each pay a flat Social Security payroll tax of 6.2% on wages up to a cap of $53,400. Moynihan's proposal would cut the tax to 5.7% on July 1 of this year, to 5.5% in 1994, and to 5.2% in 1996. After five years, workers would pay only what is required to meet the benefits payments for that year's Social Security. With some workers saving up to $2,300 each during the transition period, says Moynihan, their added spending would stimulate the economy and create jobs. Meanwhile, no increase in payroll taxes would be required until 2015, when the rate would return to the current level of 6.2%.

Reaction has been mixed. Gary Hufbauer, a Georgetown University economist, estimates that a Social Security tax cut would create a million jobs and thus add a million extra contributors to the trust fund. But Republican Senator Phil Gramm of Texas warns against "soaking the rich." Says he: "We should be debating tax cuts, but we shouldn't mess with Social Security. The system isn't broke: don't fix it." The plan's critics argue that it could cost the federal government $50 billion a year in lost revenue, a claim challenged by Moynihan.

Since tax cuts are inherently appealing to voters, this proposal is sure to provoke some frenzied political maneuvering during the run-up to next year's presidential election. The Democrats will try to argue that they are the party of ordinary Americans, while casting the Republicans as champions of the rich for supporting a capital-gains tax cut that would mainly benefit families with annual incomes of $200,000 and up. Although the Bush Administration officially opposes the Moynihan tax cut, some Republicans are trying to head off a potential political bonanza for the Democrats by supporting the idea. A number of them also favor the tax cut on ideological grounds, claiming that it will shift resources from the public to the private sector.

A coalition of strange bedfellows is starting to line up behind Moynihan's plan. The bill's co-sponsors include liberal Democrats, like Hawaii's Daniel Inouye and Rhode Island's Claiborne Pell, and conservative Republicans, like Orrin Hatch of Utah and Steve Symms of Idaho. But Moynihan still faces obstacles -- not least the Democratic House leadership. Pointing to the yawning federal deficit, House Ways and Means Committee chairman Dan Rostenkowski argues that "the last thing we should be doing is cutting taxes." Speaker Tom Foley remains on the fence. Senate majority leader George Mitchell, initially cool to the Moynihan plan, now supports it "in concept," and has suggested raising the cap as a way to offset any revenue loss.

With powerful forces building behind it, Moynihan's latest payroll-tax- reduct ion proposal stands a good chance of surviving -- but only if it can get as far as a Senate-House conference, which could happen by June. President Bush would then face the difficult choice of signing a bill -- and handing the Democrats a political victory -- or enraging voters by vetoing a law that would cut taxes for some 132 million American workers and 6 million employers.

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Social Security tax payments

With reporting by Hays Gorey/Washington