The tax campaign
If you thought the just-concluded contest for the presidency added up to a test of political acumen and fortitude, wait until you see the next - and equally important - campaign: the effort by the White House and Congress to work out a new tax-increase, budget-reduction program to reduce soaring federal deficits projected to last through the remainder of the 1980s.Skip to next paragraph
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The political jockeying involved in putting together a comprehensive deficit-reduction program is already under way. President Reagan wants further cuts in federal spending - especially involving middle-class entitlement programs. But Mr. Reagan insists that he will not raise taxes. Still, the President favors tax simplification, an effort currently under intense study by the US Treasury. A number of analysts believe that tax simplification could be used to mask actual tax increases.
Democratic House Speaker Thomas P. O'Neill, meanwhile, says that any new tax measure will have to first originate with the Republicans - since the GOP was so critical of Walter Mondale's proposal to raise taxes.
Where does all this leave the American public? Deficits continue - $175 billion for fiscal year 1984, probably close to that in fiscal year 1985, and perhaps even growing in the years ahead. Two observations seem in order:
* Tax reform: Simplification of the tax code is long overdue, given the complexity of the current system. But efforts to end popular deductions - such as deductions for state and local income taxes, property taxes, sales taxes - will trigger powerful opposition on Capitol Hill. Many of those deductions promote legitimate social purposes - such as home ownership and charitable efforts. Thus, fundamental tax reform seems unlikely in 1985. Tax reform should be a long-range objective and not linked to short-term deficit reduction.
* Tax increases: That is not to say that a tax hike should not be considered as part of a larger deficit-reduction package. It should be, but it should be undertaken in such a way as not to work against recovery. Indeed, that point will be particularly important next year, assuming economic growth falls into the 2.5 percent to 3.5 percent range, as many economists expect. Imposing a major tax increase on a softening economy could actually lead to recession. Lawmakers need to consider a tax hike that would be broadly based - yet least felt by individuals. One possibility would be to enact a European-type value-added tax (VAT), which is imposed at various stages of production and distribution. Another possibility, though it would be fought hard by congressional liberals, would be to impose a modest national sales tax.
At the same time, Congress could make modest changes in business-related taxes, including investment credits, the 15 percent corporate minimum tax, and other breaks. But again, such changes must not discourage investment and capital formation - and hence, future economic growth.