The tax bill now likely to emerge from Congress will include less than $100 billion in tax relief over five years. This is particularly disappointing, given the need and opportunity for a major tax cut. Federal revenues are approaching a peacetime high of 21 percent as a proportion of economic output, up two percentage points since Bill Clinton was elected President. Meanwhile, the Congressional Budget Office, which one year ago estimated the five-year deficit to be over $70 billion, now projects a surplus of over $270 billion, which represents a swing of $340 billion largely from higher tax receipts.

Americans need a refund of the huge and unexpected tax windfall now being received by the Internal Revenue Service. Lawmakers need to consider a tax cut package more in line with the $1.3 trillion tax cut--in today's dollars and gross domestic product (GDP)--proposed by House Democrats in 1981 as an alternative to the Reagan tax package, rather than the modest cut they are considering. If they are not prepared to consider it during this Congress, they should set their sights on the next.

Candidates and lawmakers who are committed to a serious reduction in today's record tax burden thus should design a tax plan that truly would herald the "end of big government" and begin real reforms of the tax system and Social Security. Analysts at The Heritage Foundation have developed such a plan. It would:

• Create worker-owned retirement accounts funded by five percentage points of the current payroll tax.

• Completely repeal the marriage penalty.

• Cut the long-term capital gains tax to 10 percent and reform the "holding" rules that have added to the complexity of tax returns.

• Expand "back-ended" education IRAs to all levels of education, including K-12 and plans offered by private and state institutions of higher education.

• Repeal "rollover" limits on Section 125 health plans.

• Repeal the death taxes.

• Provide a $500 tax credit for pre-school children.

According to an analysis of these tax provisions, adopting the Heritage plan would return $314 billion in income and death taxes to Americans, and $895 billion in payroll taxes, over the next five years. Using the respected WEFA Group U.S. Macroeconomic model, Heritage analysts project that these tax cuts would generate an average $10,312 in additional income for each household over the period. They also would lead to over half a million more jobs by the end of the period and an increase of more than $1 trillion in the wealth of American families as the private savings rate nearly doubles.

The Heritage tax cut plan not only would return unanticipated tax revenue to the families who earned that money, but also would trigger faster income and job growth, allow all workers to open private retirement accounts, and cut future government debt.

The Social Security tax reduction would permit typical workers to place thousands of extra dollars into private retirement plans that earn far higher returns than Social Security provides. In making that choice, workers would forego the portion of Social Security pension benefits associated with their reduced payroll taxes in exchange for income from their Private Savings Accounts. It is important to note that workers would still receive partial income benefits and full insurance benefits. Those forgone Social Security pension benefits would reduce the unfunded liabilities of the Social Security trust fund by $21.4 billion.

Taken together, the reduced liabilities in Social Security and the reduced tax revenues would result in a net reduction in the projected future liabilities of the federal government (measured in today's "present value" dollars) of over $15.5 trillion. ("Present value" is an accounting term that measures how much money would need to be invested today to finance future obligations.) These liabilities include the national debt and the projected unfunded liabilities of Social Security from 1999 to 2075.

This Congress seems poised to return only a small portion of the unexpected tax revenues now surging into the IRS and to make only small reforms in the tax system--with no reforms in Social Security. It is time now for lawmakers and congressional candidates to begin designing the framework for real tax reform and major tax reduction in the next Congress.

The principal authors of this study are William W. Beach, Director of the Center for Data Analysis; Stuart M. Butler, Vice President for Domestic and Economic Policy Studies; Gareth G. Davis, Research Assistant in the Center for Data Analysis; Robert Rector, Senior Policy Analyst for Welfare and Family Issues; D. Mark Wilson is a formerLabor Economist in the Center for Data Analysis; and John S. Barry, consultant to The Heritage Foundation.