Simpler tax, lower deficit: how to keep them working together

If there is any doubt in Congress that the American people want action on both deficits and tax reform, I offer the contents of my mailbox in recent weeks. In mid-August this column contained some proposals on both subjects, and - way down at the end - word that the Monitor would be glad to hear readers' proposals.

Well, they've come in by the score. (A selection of excerpts will be printed later this week on the Monitor's op-ed page.) There was backing for some well-known plans for cutting the deficit and simplifying taxes. There were also many ingenious and thoughtful new approaches on both subjects, some of them paying attention to specific detail. The latter should please Peter Grace and all the previous auditors of government who have put out Hoover Reports detailing waste in government.

The overall tone was not simply thoughtful and measured. It was urgent without being polemic. The answers were imbued with quiet patriotism. They did not, on the whole, take the ideological route of blaming ''devils'' for our predicament. And, most of all, many of them conveyed a willingness to make sacrifices to get the nation on track. There were frequent references to the need to make the American system of voluntary tax assessment simple, universal, and widely trusted once more.

Given this kind of ingenuity and steady morale on the part of the taxpayer/voter, why is there so much pessimism about the ability of leaders in Washington to get both jobs done?

Perhaps the simplest answer is timing.

Deficit reduction ought to be voted while we still have the luxury of a continuing strong recovery. If growth becomes puny, there will be a strong logic for continuing the stimulus that comes from deficit financing. But that will only make worse the day of reckoning when an even bigger load of interest on the national debt will have to be dealt with. So the window of opportunity on deficit-cutting may begin to close sometime next spring or summer. But that may be too early to expect completion of action on the larger project of tax simplification.

Tax reform itself may be said to have a window of opportunity that doesn't extend too far into 1986 with its midterm elections for all House members and one-third of the senators.

In that case, why not push for a second installment of deficit cuts (to add to this summer's congressional down payment) by spring or early summer '85, and then move on to tax reform in the fall or winter?

That's logical, but not realistic. Conventional wisdom is right when it says that tax reform is never passed unless there is irresistible pressure on Congress to act. In this case, that means linking voter anxiety about the size of coming deficits to tax reform.

And linkage works the other way, too: Action on deficit-cutting is a lot easier for a member of Congress if he/she can deliver a package to voters also includes tax simplification. If federal services are cut or taxes raised, the sacrifice will sell a lot better if Congress can simultaneously promise a Form 1040 that's a breeze.

All right. It's better to keep the two subjects linked together. Can't we slow down the deficit-reduction part of the package or speed up tax reform?

Given a choice, the Congress ought to play it safe and push for speed. Very few forecasters believe we can simply grow our way out of deficits of the size that loom ahead. That would take something like a 7 percent growth rate for five years or more. And there's no record of such a prolonged superheated economy in our modern past. So logic seems to point to doing something sizable about budget cuts while we still have momentum from the extraordinary Reagan recovery.

And such budget restraint should be coupled with lower interest rates, courtesy of the Federal Reserve Board. There are different lag times for the impact of congressional budget restraint and Fed stimulus. So those two steps also would need careful linkage.

Congressional committees working on Bradley-Gephardt, Kemp-Kasten, and other tax-reform bills would simply have to speed their effort or risk being a caboose left behind as the deficit-cutting engine pulls away.

That is easier said than done. Tax simplification looks wonderful (and certainly is overdue in a civilized society). But as you test the results, you become aware of the complexity and the need to minimize aftershocks.

Take, for example, the mortgage-interest deduction in current tax law. Both of the semi-flat tax bills - the Democratic Bradley-Gephardt bill and the Republican Kemp-Kasten bill - recognize a national monument when they see one. Both keep the deduction of mortgage interest. But the deduction counts for less when the taxpayer moves to a lower tax bracket, as he would if either bill were put into effect.

For a young couple about to buy a house for the first time, the change could seem too steep. And the housing industry would suffer. But the housing industry is a major component of the American economy. So the White House and Congress would want to make sure some kind of transitional cushion is provided if America moves to a modified flat tax. Otherwise, tax reform might endanger the steady growth that both deficit-cutting and Fed stimulus are designed to sustain.

If you're still keeping pace with this intricate tale of timing and political linkage, you will probably have grasped by now that it's unlikely the 535 members of Congress will be able to coordinate such a minuet on their own. They will need leadership from the President.

If the current President is reinstalled, as polls at the moment indicate, there are confusing signals as to what he might do about the deficit-reform package.

Word from Mr. Reagan's recently departed chief economic adviser, Martin Feldstein, seems to be that the President wants to close out a second term (if he has one) with a balanced budget. If so, he almost certainly needs to do something about deficits in the first year of a new term, in order to get the momentary slowing of growth over with. Then he could hope for a new period of growth, with lower inflation, more trade, and less debt burden in the later years of the term.

But word from people close to Treasury Secretary Donald Regan indicates a desire to hang loose and see if recovery alone doesn't do the trick. The only trouble with this approach is that if it doesn't work, the time will then not be ripe for deficit cutting. And a new round of deficit stimulus would move the nation back into statospheric additions to the national debt.

We shouldn't act out of fear of debt. We've dug and grown our way out of worse debt - percentage-wise - in the past. But, given an opportunity to act prudently, the White House should be ready to lead. And Reagan, or Mondale, would certainly add to his place in the history books if he could help guide tax simplification into American homes before too many Aprils pass.