White House aides begin to face up to US fiscal dilemma
A growing realism pervades the administration's economic planning as the White House comes down to the wire on the 1984 budget about to go to Congress. That realism, prompted by hard economic facts, revolves around two conclusions:Skip to next paragraph
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* The built-in budget deficit cannot be allowed to grow, without damaging the nation's economic and social fabric - not to mention Ronald Reagan's political fortunes.
* Tax revenues must be raised as a percentage of the US gross national product (GNP).
So far it is Mr. Reagan's top aides, not the President himself, who suggest more or less clearly the kinds of things that must be done.
How much of this emerges as firm policy will be known when the President unveils three major documents at the end of this month - his State of the Union address, his economic report to Congress, and his fiscal 1984 budget.
Among signs of sober, realistic assessment are the following:
Tax revenues must rise to 21 or 22 percent of GNP by the mid-1980s, according to Treasury Secretary Donald T. Regan, if the gap between government income and outlays is to narrow.
Mr. Regan, speaking at the annual business outlook luncheon of the Washington Post, said both spending and revenues should be in the 21 to 22 percent range by 1986.
Tax revenues, which made up 21 percent of GNP in fiscal 1981, are falling to 18 or 19 percent, while federal spending remains in the area of 23 to 24 percent.
Periodic warnings by the Congressional Budget Office that a growing structural deficit was embodied in administration policies were dismissed by the White House in the past as overly pessimistic.
Reportedly the President has decided to deny federal workers - both civilian and military - any pay raise during fiscal 1984, which begins Oct. 1 of this year. A freeze would save about $6 billion, some officials estimate.
Already the American Federation of Government Employees is mobilizing to persuade Congress not to agree to a wage freeze.
Reports abound about White House discussions on reforming the US tax code, with the joint aim of simplifying the code and making it more attractive for individuals and corporations to save and invest.
Two alternatives appear to be under consideration:
One would shift the emphasis from taxes on income to taxes on consumption. Under this approach, money saved or invested would not be taxed, but money spent on goods and services would be.
This would be in line with the administration's original hope that Americans would save more and spend less, thereby generating capital for economic expansion.
Currently, as it happens, administration officials hope fervently that American consumers will spend more, not less, to spark economic recovery. With corporations scaling back their own spending plans, the White House looks to a consumer-led recovery.
A second tax reform alternative under consideration would eliminate many or most of the deductions, credits, and exemptions which now stud the tax code.
Taxpayers, for example, might lose the right to deduct from taxable income interest paid on installment loans. For corporations, the investment tax might disappear.
This would greatly broaden the tax base, by making more income subject to taxation. At the same time, income tax rates - now ranging from 14 to 50 percent - would be sharply reduced.
The ultimate of this approach is the so-called ''flat tax'' - setting a uniform rate of perhaps 14 to 17 percent for all taxpayers, with few or no deductions allowed. Many experts doubt that Congress would legislate a straight flat tax, because high-income Americans would benefit more than those at the lower end of the scale, who already pay a low rate.
There is, said White House spokesman Larry Speakes, ''a ring of truth'' to reports that Mr. Reagan plans to freeze federal pay in fiscal 1984 and that he is considering tax reform.
Administration officials confirmed earlier that the President was studying a package of contingency tax hikes, to be triggered in fiscal 1986 if budget deficits remain high.
The aim of such tax increases would be to reduce the deficit to 2 percent of GNP - the approximate figure in fiscal 1981 - from the expected level of 4.5 to 5 percent.
Mr. Reagan would be able to avoid announcing tax boosts for fiscal 1984, but would be sending a signal to the financial markets that he is serious about bringing deficits under control.