The MacNeil/Lehrer NewsHour

MR. MAC NEIL: Good evening. I'm Robert MacNeil in New York.

MR. LEHRER: And I'm Jim Lehrer in Washington. After our summary of the news this Tuesday, we look at cutting taxes, first with Ways & Means Chairman Bill Archer and Clinton budget chief Alice Rivlin, then with economists Felix Rohatyn and Allen Reynolds. Jeffrey Kaye reports on the California affirmative action vote, and essayist Richard Rodriguez observes the gangsters. NEWS SUMMARY

MR. MAC NEIL: President Clinton today voiced his opposition to Republican tax cut plans set for a vote in the House tomorrow but stopped short of a veto threat. Republican proposals would cut the capital gains tax in half and give a $500 per child credit to families with annual incomes of up to $200,000. Mr. Clinton was asked for his reaction to the plan during a joint news conference with British Prime Minister John Major.

PRESIDENT CLINTON: We should not be cutting taxes in ways that benefit very wealthy Americans and requires, in turn, to cut education, which will weaken our country as a whole. Education is the middle class social safety net, if you will. It is the key to our economic future as well, so I think that's a big mistake. I think it's too big. I think it is -- we need to focus on the deficit, and we don't need to be cutting education and investment in our future to give tax relief to people who don't really need it.

MR. MAC NEIL: The President said he favors a tax cut for middle class families or one that helps pay college costs. Republicans defended the bill today on the House floor.

REP. J. D. HAWORTH, [R] Arizona: This whole debate is evidence of a disturbing mind-set on the part of the liberals from the other side of the aisle, which assumes all the money in America belongs to this government, and that this government needs the money much more than America's families. Friends, it's the American people who need tax relief. They've been tightening their belts for years, while the government has continued its big spending ways. Mr. Speaker, it is time that the taxpayer got a break, and it's time this government tightened its belt.

MR. MAC NEIL: House Republicans predict they have the necessary votes to pass the bill. We'll have more on this story after the News Summary. The U.S. dollar recovered somewhat on currency markets today. Earlier, it did fall to another low against the Japanese yen. That prompted Japan's Central Bank to buy $200 million on foreign exchange markets to help stop the fall. On Wall Street today, the Dow Jones Average rose more than 33 points to close over 4200 for the first time. Jim.

MR. LEHRER: A state of emergency was declared today in a Southern Philippines town. It followed an insurgency in the area by about 200 heavily armed Muslim rebels. They ransacked the town, robbing banks and stores. At least 23 people died in that fighting. Some reports said up to 100 people were killed. Six members of the rebel group were arrested over the weekend for alleged ties in New York's World Trade Center bombing. Government officials in Burundi today denied their troops were involved in the recent massacres of up to 150 people, many of whom were women and children. We have more in this report from Mark Austin of Independent Television News.

MARK AUSTIN, ITN: In the village of Gasorwe, these are Burundi's faces of fear. They're the only Hutus left in the place where soldiers are accused of massacring up to 150 people. The village is now largely deserted -- on the ground, the ammunition used against Gasorwe's men, women, and children. Many of them are in local hospitals with hideous wounds. And around the village, itself, freshly dug graves are scattered among the coffee plantations. Three thousand Hutus used to live in this village. Now they've all gone. It's an example of the ethnic cleansing that's clearly taking place here. These villagers who fled are too frightened to talk, but one man, who's now hiding in a nearby nuns' refuge did describe what happened. He said they came to the village and killed with bayonets and machetes. And in other village, a survivor stood by what's now a family grave.

SURVIVOR: They killed my grandfather, they killed my father, my uncle.

MARK AUSTIN: These children have witnessed firsthand Burundi's horrors. The massacres have made them orphans. They're looked after by a Burundian woman, helped by a British aid worker.

WOMAN: [speaking through interpreter] Every time there's a crisis in Burundi, it's the children, the hardest hit victims. They've lost their families or seen their families massacred.

MR. LEHRER: United Nations officials said they had unconfirmed reports of massacres in two other villages. Over the past two weeks, 750,000 refugees from Burundi have fled to neighboring Tanzania. Today the Tanzanian government expelled some of those refugees.

MR. MAC NEIL: President Clinton said today that Iraq may be trying to develop weapons of mass destruction. At his news conference with British Prime Minister Major, the President said Britain and the U.S. are working together to stop such a development. He also said both leaders oppose the lifting of U.N. sanctions imposed on Iraq until there is full compliance with the U.N. resolutions. The sanctions were implemented following Iraq's 1990 invasion of Kuwait. Japanese police raided a building today containing a chemical lab. It belongs to the religious cult suspected in the nerve gas attack in Tokyo's subway last month. In the latest of a series of raids on the cult, police seized tons of chemicals and equipment from the lab. They have not yet made any arrests in the attack, which killed eleven people and injured more than five thousand.

MR. LEHRER: Francisco Martin Duran was convicted today on charges of attempting to assassinate President Clinton. He fired a semiautomatic rifle at the White House last fall. President Clinton was home at the time, but the Secret Service said he was not in danger. A jury rejected Duran's insanity plea. The former Colorado hotel worker was also convicted on several other assault and weapons charges. He could be sentenced to life in prison. And that's it for the News Summary tonight. Now it's on to tax cuts, to tax or not tax, affirmative action, and a Richard Rodriguez essay. FOCUS - TAX CUTTING?

MR. LEHRER: Tax cuts, the last piece of the Republicans' Contract With America, is where we go first tonight. Kwame Holman begins our coverage.

KWAME HOLMAN: Action on tax cut legislation begins tomorrow in the House of Representatives, but today members warmed up for what's expected to be a passionate and partisan exchange.

REP. JOHN SHADEGG, [R] Arizona: There is one fundamental message in America today. It is that the federal government is too big, it taxes too much, it spends too much, and it regulates too much. And the American people have no debate about that issue.

REP. ALBERT WYNN, [D] Maryland: The debate this week is not about whether we ought to have a tax cut for the average American or for the senior, or for the hard working folks back home. This debate is about whether we ought to give most of the tax breaks to the wealthiest people in America who make up to $200,000 a year. I say no.

MR. HOLMAN: House Republicans want to cut $189 billion in taxes over the next five years. The tax cuts would take effect only after the House approves a plan to balance the budget by the year 2002. That specific provision was added only yesterday, in an effort to bring aboard a large number of wavering moderate Republicans more interested in reducing the deficit than cutting taxes.

REP. JOHN ENSIGN, [R] Nevada: HR-1215 will not only provide the badly needed tax relief for middle class American families and incentives for economic growth but will provide the first down payment on our goal of balancing the budget by the year 2002.

MR. HOLMAN: The Republicans' tax plan would give a $500 per child tax credit for families with incomes under $200,000, up to $145 in tax credits for married couples who filed joint tax returns. The plan reduces the top capital gains tax rate from 28 percent to 19.8 percent, and it repeals the 1993 increase on Social Security benefits, in effect, lowering the rate from 85 percent to 50 percent. Republicans responded with praise to those provisions. Democrats attacked them.

REP. J. DENNIS HASTERT, [R] Illinois: This tax bill does two things that will help older Americans. First, it repeals President Clinton's Social Security tax that he passed over Republican objections last year, and second, it increases the earnings test so that more seniors will be able to work without getting taxed at a rate twice the amount that millionaires have to pay.

REP. THOMAS BARRETT, [D] Wisconsin: $200,000; $200,000; $200,000; $200,000 -- is that middle class? Is that the middle class tax cut we're talking about? No. That's the Republican tax plan we're talking about, to help families who make $200,000, because they're middle class and they need a tax cut. Well, I can tell you, you can buy a lot of Hamburger Helper and generic cereal if you make $200,000 a year.

MR. HOLMAN: The tax plan would benefit business, reducing corporate taxes on certain profits from 35 percent to 25 percent and eliminating the 20 percent alternative minimum tax. For small businesses, the plan doubles to $35,000 the value of new equipment that can be written off and increases the estate tax exemption from $600,000 to $750,000, making it easier to transfer small businesses between family members. Those business breaks met with Democratic resistance as well.

REP. BRUCE VENTO, [D] Minnesota: This continues to shift. Thirty years ago, corporations paid nearly 25 percent of the total tax bill in this country. Today they pay less than 15. And what this Republican bill does with the next $638 million over 10 years is provide them 53 percent more tax cuts, shifting the taxes to the individual family. That's why people are angry.

MR. HOLMAN: And Democrats also attacked the methods of paying for the tax cuts. Over the next five years, $100 billion would be cut from discretionary spending, $62 billion from welfare spending, and $10 1/2 billion from Medicare spending. An additional $10.8 billion would come from increased pension contributions from federal employees.

REP. GENE GREEN, [D] Texas: Thousands of teenagers will be denied a summer job. Schoolchildren will be denied a guaranteed meal. Legal immigrants will be denied services for the $60 billion welfare reform in the cracked crown jewel.

MR. HOLMAN: This afternoon, the Republican-controlled House Rules Committee voted to allow only one alternative to the Republican tax plan to be considered on the floor, but Republican support is still uncertain, and late this afternoon, House Speaker Newt Gingrich made a last-minute appeal to House Republicans.

REP. NEWT GINGRICH, Speaker of the House: Now comes the time to beg. Whatever your complaints, whatever your problems, this is the last hurdle. We've got to get the rule passed and get on, and we desperately need your help. It ain't all that complicated. We want to work with every one of you. We've got a long year ahead of us. It's that straightforward.

MR. LEHRER: Now, to Congressman Bill Archer, chairman of the House Ways & Means Committee, leader of the Republican tax cut effort, he's a Republican from Texas, and to Alice Rivlin, President Clinton's director of the Office of Management & Budget. Congressman Archer, what is the major purpose of these tax cuts?

REP. BILL ARCHER, Chairman, Ways & Means Committee: Well, Jim, they're primarily to help strengthen American families economically so that parents will be able to have more wherewithal to support their children. We think family structure is extremely important for the future of this country, both in the area of fighting drugs and crime and education, so it's a move in that direction. And in addition, it creates much, much greater opportunities for working Americans to have their jobs in the future. And that's what we're talking about when we talk about capital savings and reducing some of the tax burden on capital savings; that is necessary to create better jobs. In addition, we're helping senior citizens to have a better life. If they want to continue to work, they shouldn't lose their Social Security benefits. This really is one of the real negative parts of the Clinton package, and also they shouldn't bear an 85 percent tax on their benefits, as was mentioned earlier on, which was put on by Clinton. So we're going to get that back down to the 50 percent. In addition, we also have incentives for people to be able to take out long-term care insurance on themselves and get tax benefits in doing so, so that it's treated like health care. People need to be able to plan for their future. We have adoption credits in there to facilitate the coverage of adoption costs for people who want to adopt children, and we have this American dream savings account that will let people across-the- board be able to put away in IRAS to provide for their own retirement. So there are a lot of real beneficial aspects of this bill.

MR. LEHRER: So it has a social purpose as well as an economic purpose?

REP. ARCHER: Yes. And it's very difficult to draw a line between the two, because social fabric and economic fabric really work together. We have a better family unit, we're going to have better work effort, and we see that the majority of people really in the poverty area are from single-parent families. So we really think that it's all tied together.

MR. LEHRER: All right. Ms. Rivlin, what is your major problem with these tax cuts?

ALICE RIVLIN, Budget Director: Well, we're not against all tax cuts. In fact, we have proposed a middle-class tax cut ourselves. We just think this bill is too big, too expensive, and it goes to the wrong people. It goes to people who don't need it. People with incomes up to $200,000 get the child credit, and the biggest part, of course, is the capital gains tax cut. Most of that goes to people in very high income brackets.

MR. LEHRER: Well, what about -- what about the Congressman's major point, that this will strengthen the American family?

MS. RIVLIN: Well, we agree with that. The American family that needs to be strengthened is young families with young children and not that much income. So we have proposed a tax credit of $500 per child for families with children under 12. But we cut it off. It phases out over $60,000 income. We think that with $60,000, you're doing reasonably well, and the Republican tax cut would go for people up to $200,000, which is hardly scraping the bottom of the barrel.

MR. LEHRER: You heard what Congressman Archer said the impact of the Republican tax cuts would be. What would be on your list of impacts if the Republican bill becomes law?

MS. RIVLIN: Well, one impact is on the budget. It's very expensive, $190 billion over five years, and much more expensive after that. It balloons. Some of the business tax cuts get very much more expensive down the road. Now, the Republicans are proposing to pay for it over the first five years but cutting programs, but they're cutting very needed programs for people who don't have much money. By our calculations, people with under $50,000 incomes would get about an $11 billion cut in benefits that go to them, and this would only partly pay for the benefits under the tax bill that go to people over $200,000.

MR. LEHRER: What about the Congressman's basic point that these tax breaks for business are actually designed to create more jobs and will, in fact, help the average American more than hurt them, even though they appear to be going to people who have -- make the most money at this point?

MS. RIVLIN: They appear to be going there, and they are going there. This is the old trickle-down theory. If you just give upper income people more and more tax break, somehow they will behave differently. I'm not sure I believe that just cutting the capital gains tax rate, which after all is 28 percent now, you get to keep 72 percent of your capital gain, cutting that down to 19 percent is going to make upper income people act very differently. I doubt it.

MR. LEHRER: Congressman Archer, Ms. Rivlin has just repeated the main rap, the major rap that has been put on your proposal, which is that the tax cuts go to the wrong people, in other words, the people who need it the least.

REP. ARCHER: Well, we've heard this from the Democrats now year after year after year. It's sort of worn out rhetoric that tries to exploit economic class struggle for political benefit. The Democrats, in effect, say that if we find somebody with enough money to create a job, we want to take it away from them. If an American makes it by hard work and sacrifice, they'd better stand out of the way because the Democrats want to take it away from them. It costs $280,000 to create one job in the U.S., so if an individual creates four jobs, that means they've got to have a million dollars of capital investment. I guarantee you, the Democrats would love to take one of those jobs off the books by claiming that they are just hitting the rich people. But as far as the child credit provision is concerned, 42 million families will benefit from this, and 75 percent of the benefits go to people with family incomes of under $95,000. So this is not a big program to help the rich. This is to help families across-the-board in this country.

MR. LEHRER: Why did you put the ceiling at $200,000? Most people consider $200,000 wealthy --

REP. ARCHER: Jim, many, many Republicans felt that in the tax code you should not have a ceiling. If you want to do something progressive in the tax code, you do it with the rates, and that's what the Democrats have been doing. But then when you want to give any sort of opportunity for people to keep more of their own money, then they say, oh, but wait a minute, you have got to somehow put a cap on it. Actually, the personal exemption that's been in the tax code for years and years and years for dependents, which is supposed to help offset the cost of bearing children, never had a cap on it. But rather than raising that to bring it up to the level where it should be after inflation, we actually approach it through a tax credit which gives more benefit to lower income people and less benefit to higher income people.

MR. LEHRER: Ms. Rivlin, what's wrong basically with letting people keep more of their own money and let them decide, even people who make $200,000 a year, let them decide how they want to spend it, rather than the government?

MS. RIVLIN: Oh, there's nothing wrong with people making $200,000 having more money if you aren't taking it away from somebody else. The point is this is reverse Robinhood, as they say. It is taking money away from people at the low end, people who are really struggling, people who need benefits. It is also taking away money that would reform our education system, give us a higher standard of living in the future, and we're doing all that under the Republican bill just so people who already have $200,000 can have a little more. That doesn't make any sense at all.

MR. LEHRER: Robinhood in reverse, Congressman Archer.

REP. ARCHER: Jim, the catch word of where we're cutting education is really ridiculous. The federal government really has very little role in education funding. It's done at the state level and the local school district levels, and my friend, Alice knows that. So it's a catch word that's thrown out there, just like they've thrown out the school lunch program where we're given 4 1/2 percent more than we're currently spending each year for the next five years and making the program more efficient. And that's what we ought to be looking at is efficiency, but every time we take away a federal program encumbered with heavy federal bureaucracy, we cut that bureaucracy out, they say, oh, you're cutting the program instead of saying, yes, we should do it differently. And we are saving $66 billion out of welfare, and the American workers out there are prepared for this. They are tired of having their dollars go to help people who are physically able to help themselves. The idea of the Clinton program on welfare is you spend more money on welfare with the promise that somewhere down the line it'll be better off. We've done that before, and we don't need any more now.

MR. LEHRER: Ms. Rivlin, has he got that right?

MS. RIVLIN: No, I don't think so. To come back to education, yes, of course, the states and localities pay a large part of education expenses. What the Clinton administration has been trying to do is help the states reform their education systems so they're more effective. The Goals 2000 program set, lets states set goals and helps them reach those goals. There is a role for the federal government in education, and we need to be making education better, and it is those programs that the Republicans are cutting, as well as welfare benefits, food stamp benefits, retiree benefits for people who've worked hard in the federal government. It is a whole set of things that are not very desirable cuts but especially not desirable when the benefits are going to people who don't need it.

MR. LEHRER: Congressman Archer.

REP. ARCHER: Well, Jim, it's interesting that our package, which will be on the floor tomorrow, has $30 billion more in deficit reduction than the Clinton budget. And I know Alice Rivlin has been a deficit hawk most of her life, but the Clinton budget really doesn't do it. It continues deficits as far as the eye can see between two hundred and fifty and three hundred billion dollars a year. It increases the federal debt over the next five years by over a trillion dollars, which then sets up additional debt service charges that will be between seventy and a hundred billion dollars more per year. We have to stop this. And our package, even with the tax reductions, nets out at saving $30 billion more against the deficit than the President's proposal.

MR. LEHRER: Congressman Archer, have you got the votes tomorrow to win those?

REP. ARCHER: I think we do, Jim. I believe we do. This is the final item in the Contract With America, and we're going to be different than previous politicians. We're going to do what we said we were going to do last October.

MR. LEHRER: Ms. Rivlin, if this goes through the House tomorrow and then through the Senate, will the President sign it, or will he veto it?

MS. RIVLIN: I think in its present form, the President would probably veto it. I don't want to guess about that. I would certainly advise him to veto it, because it is not in accord with what we think is either good tax policy or good budget policy. There's very little to cut the deficit in this, in this budget. It just uses those cuts to pay for tax cuts for the wealthy.

MR. LEHRER: All right. Ms. Rivlin, Congressman Archer, thank you very much.

REP. ARCHER: You bet, Jim. FOCUS - TAX & SPEND

MR. MAC NEIL: Now, another approach to the tax debate. This afternoon, Business Correspondent Paul Solman conducted a discussion on the economic theories behind Washington's tax politics.

PAUL SOLMAN: The current tax cut debate is the public policy side of a fundamental debate about taxes and government, and for that, we're joined by Alan Reynolds, an economist with the Hudson Institute, and Felix Rohatyn, a senior partner with the Wall Street firm Lazard Freres. Now, one key Republican argument has been that America is overtaxed. Felix Rohatyn, longtime Democrat, a believer in an activist government, are we in America overtaxed?

FELIX ROHATYN, Investment Banker: But not a lover of taxes.

MR. SOLMAN: Personally or?

MR. ROHATYN: Personally or collectively.

MR. SOLMAN: Right.

MR. ROHATYN: You know, all these are relative questions. Certainly compared to a lot of other western developed countries at the federal level, we're not overtaxed. I think when you begin to put together federal taxes, state taxes, and local taxes, such as we have, for instance, in New York, you get up to some fairly, fairly, fairly high levels, which are sort of comparable to the levels of say European countries. Look, I don't like -- nobody like taxes, but the question really is: Are you overtaxed relative to what the government is supposed to do, what the government provides for you, what you think the government ought to provide? These are very subjective questions. I kind of approach it from a somewhat different perspective, which is, you know, what should we be trying to do with our economy as we approach the year 2000? And it seems to me that's where you fit the tax question in, because I think you need heavy investment in the 21st century, you need high levels of education, high levels of research, and a strong currency. Now, it seems to me that you have to fit the issue of how much should the tax burden be or what kind of budgetary policy and what kind of trade policy should you have in terms of those issues, and so for the moment, I would put -- since the economy is growing and I don't see the risk of a recession at this point -- I would put the emphasis on reducing the borrowing requirements of the government and trying to towards a balanced budget ahead of cutting taxes at this particular point in time.

MR. SOLMAN: So, Alan Reynolds, you're associated with the supply- side argument, traditionally very different than what Felix Rohatyn is associated with. Are taxes -- if we're overtaxed, is that a very important thing? Is that preventing us from going in the direction that presumably you would agree with, that by the year 2000 or thereafter we would be a growing vital, vibrant, educated economy?

ALAN REYNOLDS, Economist: Sure. Well, we're very -- supply-side economics is concerned with incentives, incentive to supply labor to work harder, for more people to work, for them to work longer hours and take more responsibilities, to get better educations. It's concerned about incentives to save and incentives to invest. And tax rates affect these things, and tax rates have to be reasonably competitive with those of other countries. Some people would say, well, relative to say Sweden, we're undertaxed,but Sweden has a very troubled economy. Relative to say the Asian NIC's, we have very high income tax rates.

MR. SOLMAN: Now, the Asian NIC's are the Newly Industrialized Countries, NIC's.

MR. REYNOLDS: Right. So it really depends on relative to successful economies, I would say in terms of income tax, the answer is yes, we're pretty steeply taxed, a very progressive tax rate.

MR. SOLMAN: In fairness, we are -- in the last thing I saw, last survey I saw -- we are like 25th of the 26 most industrialized countries, maybe not the, the growing Asian economies, but in terms of the economies to which we're usually compared, we are relatively, in fact, we're extremely low, low tax, no?

MR. REYNOLDS: Well, those are the OECD countries, and most of them are Europe. That's Belgium, Luxembourg, and so on.

MR. SOLMAN: Right.

MR. REYNOLDS: And that also has to do with how much money you're collecting. Now, a lot of high tax rates don't yield much money, and that's a key issue here. We have had two income tax increases in 1990, in 1993. In 1994, the federal income tax brought in 8.2 percent of GDP, 8.2 percent of the whole economy's income. In 1989, before those tax increases, it brought in 8.6 of GDP, so we've actually, that particular tax is collecting less revenue, even though the rates are higher.

MR. SOLMAN: So you're arguing that taxes ought to be cut because we're actually -- it's going to be more efficient if we cut them in terms of collecting as well as incentivizing people to work harder, that's the key to the supply-side --

MR. REYNOLDS: You get a bigger, stronger economy with a longer expansion, and you get less evasion and tax avoidance of that sort of thing, which at rates of 36 and 40 percent, people do go to great lengths to avoid paying taxes.

MR. SOLMAN: Do you disagree with this, or you just think it's not that important, given where we want to go?

MR. ROHATYN: Well, I think it's important.

MR. SOLMAN: I mean, cutting taxes is not that important?

MR. ROHATYN: I just don't believe -- first of all, I'm skeptical of the theory because the one time we tried it -- and I know there are all sorts of arguments that say we didn't try it correctly -- which was in the 80's, we --

MR. SOLMAN: Under Ronald Reagan.

MR. ROHATYN: Under Ronald Reagan. We cut taxes dramatically, and, and ran up $3 trillion of debt. Now, I know we didn't cut expenditures, and the argument is that had we done so simultaneously, it would have worked out differently. The question in my mind is whether the political structure allows for a dramatic cut in expenditures at the same time as you're cutting taxes, and I haven't seen that happen. So I'm rather skeptical of the notion that cutting taxes is going to create growth and at the same time allow this, this expenditure reduction. Now, I have no problem with the suggestion that we cut taxes at some point down the road when we have shown that we're going to continue bringing this budget into balance, but to do it when the economy is still fairly strong, when interest rates, if anything, are probably more likely to go up than to go down, when our currency has collapsed, which I think is an important point, strikes me as something I would be, I would be loathe to do. I would say one thing that I think is worth talking about at some point. There are areas where I think we're grossly undertaxed and where I think very large tax increases would be more than appropriate if they're used to reduce income taxes. And those would be taxes on items such as gasoline where, in effect, we're subsidizing a whole, a whole activity and imports of oil at rates that are just astronomical, and, and for a purpose that I think could generate a great deal of income and could then be used to reduce other kinds of taxes. But that's, that's tax reform as opposed to simply a tax cut.

MR. SOLMAN: Is -- Alan Reynolds, do you think that it is fair to talk about raising some taxes, lowering others, to get the, the ideal mix that gets us, all three of us and everybody in the audience, I assume, where they want to go, which is to say a more vibrant economy in the long run?

MR. REYNOLDS: Sure. All I'm saying is that high marginal tax rates, there are certain specific taxes, one is just plain high tax rates, high brackets; the other is capital gains tax, doesn't yield much if anything. Those rates can be cut without any great revenue loss, if any, to the government. Ultimately, the government's revenue is going to depend on how healthy the economy is, and there are some types of taxes that will improve the health of the economy, improve savings, strengthen the dollar, both because we'd have more savings domestically and because we would attract capital into our markets, foreigners would want to invest here again. There are certain kinds of tax rate reductions which should not be equated with tax cuts meaning just let's give away money. I'm not out to deprive the government of money, particularly. I'm out to improve the health of the economy in the long run, and you do that with more savings and more labor. We're running short of labor. Unemployment is already very low, can't get much lower. We're running short of capital. Capacity utilization is strained. Our factories are running flat out. And there are -- what we need to be doing is tailoring the tax program to improve these things. I've not been hostile in the past to gasoline taxes or sin taxes. We have, in fact, reached into those pockets a few times, but that's a whole different subject.

MR. SOLMAN: But the nub of the supply-side argument, is it not, is that you are going -- that in general we'll lower taxes, that in general, that'll bring forth this greater productivity, working harder and so forth, and that's what you -- that's the essence of what you believe?

MR. REYNOLDS: Yes. And all of the -- every country in Asia follows this policy with great success and gets a lot of revenue, and so did the U.S. in the 80's. Our real tax revenues from 1980, real inflation-adjusted, 1980 to '89, rose by 28 percent. That's a pretty healthy increase. We won't be able to match that in the 90's.

MR. SOLMAN: Are you skeptical? Forget the numbers exactly, because I guess we could argue about them probably till the cows come home, but are you skeptical about the basic notion here, and is that the fundamental divide or the fundamental debate that's going on now behind what we're hearing day to day?

MR. ROHATYN: Well, my, my not skepticism, I just think that first of all nobody can be certain of any of these things. I mean, economics is neither a science nor a religion, and it's very imprecise in not necessarily what happened over the long run but over the short -- over the relatively short run about actions and reactions. And I still -- I still believe that in a rather simplistic way, I would -- I would deal with a budget deficit because we know we can't go on borrowing money at the rates we have been without running into serious problems; dealing with the collapse of the dollar, because we can't do that either, dealing with our trade deficit, and dealing with issues that we have to deal with domestically,such as education, of city problems, which are about to blow up in our face, et cetera. I don't see, frankly, at this point that a tax reduction is No. 1 on that list of priorities, because I don't think it will have the effect that Alan thinks it will have. I don't think it will simply create enough growth at this point to offset the negative impact that I see of taking money away from other purposes.

MR. SOLMAN: And so what you're worried about -- you don't necessarily believe his argument, but you're worried that it could have harmful effects? And you've written about that even recently, yes?

MR. ROHATYN: Well, I think that, obviously, if it doesn't have the effect of being offset by offsetting growth, then what you're going to have to do is simply, is to simply cut budgets that are going to have to be cut dramatically in any case. And we see what it's doing. I think we're not paying enough attention to what's happening at state and local levels, which is going to be dramatic, and creating some types of situations that we're going to have serious problems dealing with. In addition --

MR. SOLMAN: So it exacerbates that if you have a tax cut?

MR. ROHATYN: It could, in addition to the fax that we have to refinance I think $2 trillion of the national debt over the next four years, plus finance another trillion of deficits that's coming in, and if we keep on creating a situation where the value of the dollar is under pressure because people are worried of our deficits, I think we could have a situation that one of these days is going to be very troublesome.

MR. SOLMAN: And so you don't want a tax cut in that kind of environment?

MR. ROHATYN: At this point, no, I do not.

MR. SOLMAN: We only have a little time left, less than a minute, but I just want to get a quick response from both of you. Are we at a historical turning point with regard to the debate on taxes in America? I mean, is this a historic moment, do you think, Alan Reynolds?

MR. REYNOLDS: Well, clearly, there's going to be a very big debate. There's the Kemp Commission, the army flat tax, possibly pulling savings out of the tax base. There are things that need to be done before we get to that. That's going to come in the '96 race, there's no question about it, but there are things we need to do to sustain this expansion, and some of the items that are in the contract, such as capital gains tax cut, would be conducive to keeping this economy going. We can't count on making it to '96 without a bumpy landing.

MR. SOLMAN: And you've looked at these things for a long time. You've been on the show since the beginning of it. Do you think we're at an historical turning point in taxation?

MR. ROHATYN: No. I think we're at a historical turning point in respect to a real dialogue in this country about the role of the government, and the role of the government that includes the role of the government vis-a-vis the states and the cities. You can't have a discussion about the role of government without talking about taxation among a number of other things. I think that dialogue is happening. I think Alan has one side of the dialogue. I'm not necessarily on the other side of it, because I'm very much for tax reform, for instance, and a lot of these things Alan talked about I'd like to see taken up as part of a large part of tax reform, and if Jack Kemp's committee comes up with some things, I think that's healthy. But I do think it is a broader issue than just taxes. It is: What is our government supposed to do? What are the states supposed to do? What are the cities supposed to do? What are the individuals and families supposed to do, and how do we do it in a world that is now driven by global capital markets, by technology that is available to anybody, and a world that is hugely competitive and brand new, brand new in terms of its make-up, the absence of the Communists, the fact that anybody can compete with anybody else all over the world, and requires a certain basic wherewithal of education, of infrastructure, of housing, of health, itself.

MR. SOLMAN: Well, that gives us topics for the next 20 years' worth of discussions, I would think.

MR. ROHATYN: I would think so. I hope you get a sponsor.

MR. SOLMAN: Thank you both very much.

MR. LEHRER: Still to come on the NewsHour tonight, affirmative action in California and a Richard Rodriguez essay. FOCUS - SPECIAL TREATMENT?

MR. MAC NEIL: Next, to California, and the battle over affirmative action. At issue is a proposed constitutional amendment that would bar the state from giving women and minorities preference in public education as well as in state government jobs and contracts. Correspondent Jeffrey Kaye of Station KCET- Los Angeles reports.

JEFFREY KAYE, KCET: Supporters of a fledgling anti-affirmative action campaign say theirs is a crusade for a color-blind society.

GOV. PETE WILSON, [R] California: [Feb. 25] Let us begin to undue the corrosive unfairness of reverse discrimination.

MR. KAYE: Earlier this year, California Governor Pete Wilson, who says he's considering running for President, endorsed a proposed state constitutional amendment to eliminate affirmative action.

GOV. PETE WILSON: I will support, and I urge you to support the California Civil Rights Initiative to restore fairness and equity.

MR. KAYE: The amendment would overturn current state laws and regulations which allow government agencies to consider race and gender in public education, as well as in government jobs and contracts. Thomas Wood is co-author of the proposed initiative.

THOMAS WOOD, Initiative Co-Author: The California Civil Rights Initiative would prohibit the state of California and all of its political subdivisions of agents, cities, and municipalities from using race, sex, color, ethnicity, or national origin as a criterion for either discriminating against or granting preferential treatment to any individual or group in three areas of state action: public education, public employment, and public contracting.

MR. KAYE: Why is it needed?

THOMAS WOOD: It's needed because there are laws and interpretations of laws that argue, preposterously in our view, that it is a permissible interpretation of federal and state statutes protecting individuals against discrimination to allow or to encourage discrimination against certain individuals who are "over-represented" in the population. Often those are whites or males or both, but in California, increasingly, Asian-Americans as well.

MR. KAYE: At stake are affirmative action goals and timetables designed to make up for past discrimination. There are no reliable statistics on the number of people who have actually benefited from affirmative action, but if there were, Emile Gardner and his wife, Adrienne Sasser-Gardner, would be included.

EMILE GARDNER: We were involved with the interface design requirements for this communications system.

MR. KAYE: The Gardners are partners in a black-owned consulting firm which has received contracts from the Los Angeles Metropolitan Transportation Authority. The MTA has set minimum goals for the percentage of work it wants done by companies owned by women and minorities. The Gardners employ 60 people. Sasser-Gardner says affirmative action has provided qualified companies like hers opportunities to do business.

ADRIENNE SASSER-GARDNER, Urban Planner: Without these programs, the opportunity to keep your foot in the door would not exist, and the opportunity to open the door would also not exist. With affirmative action programs, it has mandated that we have an equal opportunity to step up to the table and participate in the economic development of this country. Without that process, we have been traditionally shut out.

MR. KAYE: But what some see as opportunity, others consider discrimination.

MICHAEL CORNELIUS, Civil Engineer: They mask it in terms of goals, but when it comes down to really getting down to the nuts and bolts of what it is, it's a quota, and they award projects based on gender and race.

MR. KAYE: In this case you lost simply because of your race?

MICHAEL CORNELIUS: That's correct, without a doubt, absolutely.

MR. KAYE: Civil engineer Michael Cornelius is suing to overturn the affirmative action program of the MTA, the same agency the Gardners do work for. He sued last year after the MTA rejected his bid to work on the building of an LA subway station. Even though his team submitted the lowest bid, the MTA determined they hadn't made a good faith effort to provide women and minority-owned firms with 25 percent of the work.

MICHAEL CORNELIUS: We achieved 22 percent, 22 percent out of 25, and the agency immediately rejected our bids and gave it to the next guy. When I went to school, when I took a test, if there's 25 points on a test, and I scored 22 out of 25, I said I did pretty well. MTA says you will not get the job unless you meet this quota, and the upshot of it is the MTA is giving contracts for more dollars based solely on race or gender. And I think that's wrong.

MR. KAYE: Cornelius's team lost out to a contractor whose bid was more than $2 million more. Cornelius feels public contracts should go to the low bidders, period. But Sasser-Gardner says that without affirmative action, the old boys network would rule.

ADRIENNE SASSER-GARDNER: Because what happens when a bid comes out, a company bids on it, and if it is not mandated that you use minority subs, then they don't have to. They could use business relationships, which also become sort of business social relationships that are ongoing and continuing year after year.

MR. KAYE: The move to dismantle affirmative action has been endorsed by the state Republican Party. Even GOP officials like Wilson, who in the past supported affirmative action, now criticize it. Joe Gelman is manager of the Anti-Affirmative Action Campaign.

JOE GELMAN, Los Angeles Civil Service Commissioner: There is no old boys network. Our challenge is to open up the system to every individual, irrespective of race, color, creed, or gender. I can't say that enough times.

MR. KAYE: Gelman, a member of the Los Angeles City Civil Service Commission, feels affirmative action programs are unnecessary.

JOE GELMAN: I know about the City of Los Angeles. The person that runs the personnel department of the City of Los Angeles, a very fine woman by the name of Fay Washington who's African-American, she's running the system. She's running the personnel department. Is she the old boys network that you're talking about? Nobody envisioned that affirmative action would be around forever. Most people saw it as something like training wheels that ultimately at some point have to come off.

MR. KAYE: Do you think it's done it's job?

JOE GELMAN: I think to an extent it's done some, but I think in many ways it's done more damage than good.

REV. J. B. HARDWICK: And everything that we accomplished during the turbulent times of Dr. Martin Luther King and so many others, that very movement is being threatened.

MR. KAYE: The assault on affirmative action has liberalized, as well as civil rights, labor, and minority activists.

REV. J. B. HARDWICK: We are facing one of the most crucial moments in the history of our nation.

MR. KAYE: At a recent strategy session, Democratic State Sen. Diane Watson offered an ominous invocation.

DIANE WATSON, State Senator [D]: "In Germany, they first came for the Communists, and I didn't speak up because I wasn't a Communist. Then they came for the Jews, and I didn't speak up because I wasn't a Jew."

MR. KAYE: Watson quoted a German priest imprisoned during the war for his anti-Nazi activities.

DIANE WATSON: "Then they came for me. And by that time, no one was left to speak out." My friends, that's what this morning is all about. That is the reason why those of you who are non-black, non-people of color are here, because you understand that we have to speak up for each other.

MR. KAYE: Activists promised to mount a vigorous campaign against the proposed initiative. Constance Rice, western regional counsel for the NAACP Legal Defense and Educational Fund, is offended by the notion that affirmative action programs are no longer needed.

CONSTANCE RICE, NAACP Legal Defense Fund: We are not at a point where discrimination has been removed. Discrimination is still pretty prevalent. We have tests. And what's interesting is that the people who are proposing this say we feel like discrimination is over. Those were the old days. We don't have George Wallace and Bull Connor anymore, therefore it's gone. Well, affirmative action addresses the current systems of discrimination, the current systems of exclusion. That's all affirmative action is. Of course, it's been demonized to the point where people think that affirmative action amounts to illegal quotas, it doesn't matter that it isn't true, it is now the conventional wisdom, and that's why, partially why, we're in the position we're in now.

MR. KAYE: But the staunchly pro-affirmative action position advocated by Rice and other Democrats here is not the position of more moderate Democrats, among them the chair of the California Democratic Party, Bill Press, who says affirmative action is open to criticism.

BILL PRESS, Chair, California Democratic Party: Is affirmative action now being used perhaps to discriminate, instead of preventing discrimination? There's some evidence that it has.

MR. KAYE: Other moderate Democrats feel the affirmative action debate can help redefine the Democratic Party.

JOEL KOTKIN, Democratic Leadership: And I think affirmative action as interpreted as race preferences or gender preferences is one of the reasons why Democrats have been losing and will continue to lose until they find a new principle for what the party is about.

MR. KAYE: At a recent steering committee meeting of the centrist California Democratic Leadership Council, Joel Kotkin urged the group to reconsider affirmative action.

JOEL KOTKIN: I think this is a great opportunity, and it should be regarded as a great opportunity to sort of re-think about what the Democratic Party is about and why it's in the shape that it's in today.

MR. KAYE: Initiative co-author Wood, a Republican, presented his proposal to a largely receptive Democratic audience.

THOMAS WOOD: If youstop to think about it, it is impossible to give preferential treatment to an individual or group on the basis of these criteria without discriminating against somebody else.

MR. KAYE: Law Professor Carrie Menkel-Meadow defended affirmative action.

CARRIE MENKEL-MEADOW, Law Professor: Affirmative action has always included the requirement that anyone in a position of any kind, university admission or a job, be qualified for their position.

MR. KAYE: Menkel-Meadow suggested affirmative action was fundamental to Democratic Party principles, but she seemed in hostile territory, and some questioners took her to task.

CHARLES SENA, Democratic Leadership Council: I believe that it is almost insulting to say that there are people from various groups that cannot make it, that there need to be special preferences or prejudices.

CINDY COOKE: You talked about justice for women and minorities. I'd like a little justice for Anglo men who aren't doing very well in the culture. I mean, I'd like justice for all people who are not doing well, creating a ladder for all of them to move up.

MR. KAYE: But as some Democrats strive to redefine their constituency, Rice feels the party may be losing hold on an old one.

CONSTANCE RICE: In California, there's a fault line in the Democratic Party. For the first time, I hear in the African- American community staunch Democratic activists talking about why should we vote for people who can't even stand up for these marginal programs that keep people who are competitive in the pool? And for the first time I've heard Democratic leaders talk about closing the door, going behind closed doors and determining whether they're going to become independents. I've never seen that before, but I'm seeing it now.

MR. KAYE: Many moderate Democrats are pushing for an alternative ballot measure to provide affirmative action on the basis of class, rather than race or gender.

JOEL KOTKIN: What I think we need to do is to move away from the race, gender, and towards something that really emphasizes the economic and that is in the historic role of the Democratic Party, which is helping poor and working class people gain access to education and resources.

CONSTANCE RICE: When you talk about people of equal classes, race still matters, and the anecdote that I use is not a matter of data or studies, but the anecdote that I use puts it very well, is when you ask suburban, white college-age kids, if you had to be black from now on, starting at midnight, how much, if anything, would you require? We're not saying poor black. We're saying middle class black. And they tell you, if I had to be black for the rest of my life, I'd want a million dollars a year for the rest of my life.

MR. KAYE: Last week, a committee of the state legislature defeated a bill that would have put the California Civil Rights Initiative before voters. In response, backers of the initiative promised a petition drive to place it on the November '96 general election ballot. The move is sure to give the racially-charged initiative even greater prominence in presidential election year politics. ESSAY - GANGSTERS

MR. LEHRER: Finally tonight, essayist Richard Rodriguez of the Pacific News Service discusses gangsters.

RICHARD RODRIGUEZ, Pacific News Service: A photographic exhibition of gang life in Los Angeles recently opened at a gallery on 5th Avenue, New York. "East Side Story" exhibits 50 black and white photographs by Joseph Rodriguez. You can see these troubling images through April at the International Center of Photography. Last week, I met a woman in Texas who has a 14-year-old son. She was well dressed, middle class, I'd guess. She said she is losing her son to the gangs of San Antonio. Tears welled up in her eyes. She spoke of the attraction of the gangs on her son as though it were a virus or a seduction beyond his power to resist. Gangs, las gangas, in the jargon of East L.A. Look at Joseph Rodriguez's bleak photographs and recognize the faces. Don't we see these kids under arrest every night on the evening news? Didn't we see them on the afternoon talk shows talking about their lives which remain, nonetheless, inexplicable to us? They appear as alien as Oliver Cromwell's roundheads. We say we do not get the point of their display, we cannot decipher their tattoos or their hand signals or their graffiti. Babies get shot in the crossfire. Kids shoot at kids who look just like themselves. The "gangstas" say that the gang is the only place in the great city where they find love. That's the word they use, "love," and family, man. But trying leaving the gang and the people who love you will end up coming after you with murder in their eyes for your act of betrayal. There are gangs that hold generations together. I've met old men in East LA who belonged to gangs that their grandsons now have joined. I have seen the old men's tattoos, wrinkled blue from time, but more often, in East LA, you meet parents who weep because they are losing their daughters and sons. All over Los Angeles today, we meet Latin-American immigrants, legal or illegal. Many are peasants from villages thousands of miles away. They have traveled between languages, between cultures. They have covered thousands of miles and several centuries. And then you meet gang kids in East LA, their grandchildren or children. The gang kids end up living in tiny tribes, confined to four blocks, their turf, in the immense metropolis. Is it that America becomes too big for our children? The granddaughter of sharecroppers who 40 years ago traveled to New York, that granddaughter ends up eating in a black dormitory at a university and only associating with other blacks. The grandson of immigrants, who abandoned convention and custom for Ellis Island, ends up knowing only other white kids just like himself. Have America's children learned from adults that the best way is the path of withdrawal? Americans keep moving farther and farther. Suburbs extend beyond suburbs, twenty, thirty, forty miles from what we used to call the heart -- what we now call the inner city. Meanwhile, in the elegant silence of a 5th Avenue gallery, the bravery of Joseph Rodriguez's art is apparent. His camera has intruded on tribal secrets at no small cost, one suspects, to the photographer. But the danger of a photography exhibition like this one is that it turns us into voyeurs and the kids into freaks. Children we would never dare stare at on the street we can study in black and white. Kids whose names we will never know or want to know are figures of our curiosity. I look at the gang kids that Joseph Rodriguez has photographed, and I want some alternative to the political conservative's moral superiority or the liberal's sentimentality. One wants a connection. But that is precisely what is missing. The viewer of these photographs is not connected to the faces he sees. The irony is that we are all becoming as tribal, as segregated in our narrow worlds as the East LA "gangstas." The irony is that these children with their Mexican faces are, in fact, our American children. But we will not claim them. I'm Richard Rodriguez. RECAP

MR. MAC NEIL: Again, the major stories of this Tuesday, President Clinton criticized two Republican tax cut plans but stopped short of threatening a veto, and Francisco Duran was convicted of attempting to assassinate the President last fall. The former Colorado hotel worker could face life in prison. Good night, Jim.

MR. LEHRER: Good night, Robin. We'll see you tomorrow night. I'm Jim Lehrer. Thank you and good night.