Your Money And The Gop

When you've got it, flaunt it--because if you lose it again, you're stiffed. That urgent thought is driving every member of the Republican Congress, as party leaders tackle bills bottled up since the Democrats seized the Senate in 2001. In theory, the exploding federal budget deficit should crimp their plans. But the "deficits don't matter" wing of the GOP finds itself in a sweet spot. Voters care about jobs, not budgets, and the jobless recovery makes any tax cut or business subsidy salable.

So it's full speed ahead for the Republican wish list, with practically everything tagged as "pro-growth." Dems can exert some influence in the Senate, but not much. Targeted efforts at economic stimulus aren't part of the game plan, although the high rate of government spending automatically provides support. In essence, the GOP will focus on changing the tax system's fundamental structure, with emphasis on the interests of business, investors and higher earners. Tax cuts are possible, later in 2003. What to watch for:

Abolishing the estate tax, permanently. Republicans call this the "death tax" and falsely suggest that every corpse will pay. In truth, estate taxes generally apply only to inherited wealth worth at least $1 million and left to someone other than a spouse. In 2001, the tax was phased out over the following 10 years but then reimposed for 2011. That bit of weirdness--a budget shell game--hid the long-term cost. Now, however, questions of cost are for crybabies. Only 2 percent of all estates pay any tax, so they get all the savings, too.

One angle to watch: inherited capital gains have always passed tax-free. The 2001 law threatens to tax them in 2010. Wanna bet?

Faster phase-ins for the income-tax cuts passed in 2001. Two more rate cuts are scheduled--one in 2004 and another in 2006. There's talk of accelerating those cuts to put more money in your pocket. But put money in whose pocket? You may be surprised to learn that two thirds of all taxpayers--those in the 15 percent bracket and less--get no further cuts. This dominant group of wage earners received their one and only rate reduction back in 2001. All the rest of the cuts apply only to those in the 27 percent bracket and up--the top one third. Congress may vote to make these future cuts permanent--a symbolic gesture, because we can't tell what the country may need 10 years from now.

Business-tax cuts. Business could get a quick boost from a temporary tax credit for investment, says economist Kevin Hassett of the American Enterprise Institute. But policymakers have their eye on more sweeping change--especially, lower rates on corporate earnings. Rate cuts in exchange for ending business subsidies and loopholes would be a good trade. But businesses want lower rates and loopholes, too.

Lower taxes on dividends. Supporters argue that dividends shouldn't be "taxed twice"--once, when reported as corporate profits and again, when shareholders receive them as income. If this cut went through, dividend-paying stocks would soar.

A tax break for investment losses. At present, investors with taxable accounts can write off up to $3,000 a year in capital losses against their ordinary income. There's talk of doubling that to $6,000--a bailout for investors and brokers, who'd earn commissions as losing stocks were sold. More than half of this tax break would go to people with incomes above $100,000, says William Gale of the Brookings Institution. You would not get a write-off for losses in retirement plans such as IRAs or 401(k)s.

Higher contributions to retirement plans. This year, you can put up to $3,000 in an IRA (plus an extra $500 if you're 50 and older) and $11,000 in a 401(k) (plus $1,000, past that magic age). Over the next few years, these amounts are scheduled to rise to as much as $6,000 for IRAs and $20,000 for 401(k)s. Congress might "encourage saving" by raising those ceilings now--but encourage whose saving? Of IRA holders, fewer than 5 percent contribute the maximum, and the numbers are similar for 401(k)s. Only high earners would make some money from this change.

No Medicare money for prescription drugs. The GOP plan proposed last year would subsidize private drug policies for seniors. But this coverage doesn't exist yet, its base cost is unknown and outlays could climb by 14 percent a year. The trick will lie in designing a plan for hard cases that doesn't also subsidize people who can afford to pay.

Privatizing Social Security. Not now, and not just because investors are running, screaming, from stocks. The idea is too controversial for a pre-presidential-election year. If Bush wins again, you'll see it back on the table in 2005--with a cost in federal borrowing that's off the charts.

In today's slow economy, budget deficits aren't a problem. But going forward, "fiscal policy is in chaos," says Rudolph Penner, who ran the Congressional Budget Office during the '80s. Between 1990 and 1998, he says, spending directly controlled by Congress grew by just 1.3 percent a year. Since then, it has surged to 6.2 percent and nobody cares. Remember the "lockbox" that would save future revenues for Social Security? That was from another world.