Both houses of Congress gave final approval last week to a compromise tax bill that is supposed to be the down payment in getting the federal budget into balance.
The results are not exactly magnificent, and Sen. Lawton Chiles (D) of Florida commented that the tax increase isn't even a down payment on the down payment. As a token of action still to come, however, it is more than mere tokenism.
We all need to understand why the federal deficit has priority in the list of today's problems needing solutions. But first, it's useful to see how the United States got to this point. The deficit resulted from a combination of severe recession and the three-year, 25 percent income tax cut.
The tax cut itself represents a conscious decision to boost private-sector growth through new incentives. Not stated, but understood just as clearly by analysts of the federal budget, the tax cut made it well-nigh impossible for any Congress during the rest of the 1980s to enact major new spending programs. The tax cut also served as a vehicle for rekindling the economy without revving up the engines of inflation once again. (That is, a smaller tax bite could to a large degree substitute for a loose monetary policy. This left the central bank freer than otherwise to conduct a neutral, or noninflationary, monetary policy.)
This approach has worked well on the whole. Inflation has been receding quarter by quarter (the indicated current rate of less than 3 percent is the lowest in almost 20 years), in the face of one of the strongest business expansions in the post-World War II era. Unemployment has gone down faster than economists had been predicting.
So, in saying that the deficit is now the major problem, one must also say that this is because inflation and slow economic growth are no longer the main problems. Deficits in the $150 billion-to-$200 billion area are just as dangerous to the long-run stability of the economy as were 13 percent inflation rates. Deficits compete for funds in the marketplace the year they occur. They also increase, permanently, the interest expense in the federal budget and make budget balancing in future years more precarious.
Deficits have also come to be an obstacle to international harmony. Because of them, interest rates are abnormally high. High rates suck in funds from abroad, depriving other nations of indigenous savings that should be financing their own growth. The rush of funds into the US dollar, in turn, has put too high a foreign-exchange value on the dollar. This is hurting US exports and depriving the US economy and labor market of what should be a major source of growth. And high interest rates, as seen in current negotiations over third-world debt, are needlessly escalating those nations' debt servicing requirements.
The bill passed last week is designed to raise taxes by $50 billion, through a list of rather small changes (such as an increase of $2 a gallon in the federal tax on whiskey and an extension of the 3 percent telephone excise tax). Along with $13 billion in spending cuts and still-to-be-enacted decreases in the amount of defense spending increases, the total package will constitute the down payment on the battle against the federal deficit that will be joined in 1985.
It is probably a good thing that further tax actions won't come until next year. For one thing, supply-side economists claim the deficit is shrinking faster than expected because of the new approach taken by President Reagan. In even six more months, the degree to which their claims are correct should be that much clearer. Beyond that consideration, the nation needs some time to consider alternative ways to raise more revenue. There are no easy ones.
The issue demands a thoughtful, fair approach - one that won't undo what economic progress has been made thus far in the 1980s.