WASHINGTON — TO tax or not to tax? George Bush's protestations to the contrary, that will be the Hamlet-like question confronting him when he assumes the presidency and faces the realities of the federal deficit. The American people have read his lips and still expect him to increase taxes, according to recent polls.
The question is central as Mr. Bush plans his domestic priorities. Although he has yet to spell out his agenda, his overarching concern, economic and political analysts agree, is to assure the continued health of the United States economy. Reducing the budget deficit will have to be a component of policy.
``His first priority is to maintain economic growth,'' says Jerry Jasinowski, chief economist of the National Association of Manufacturers. ``That will require market access abroad, expanding exports, and generally making progress on the international front on one hand and making some progress on the budget deficit, so capital spending will continue.''
With the US now functioning in an increasingly interdependent global economy, domestic economic policy is closely linked to international considerations. Thus an early concern for Bush will be to open up Japanese and other markets by implementing the trade law passed in the Reagan administration.
SOME senior administration officials worry, too, about foreign reaction to the state of the dollar if Mr. Bush and Congress do not move on the deficit. Unless Bush comes out with a solid long-term plan for bringing down the deficit, say officials, he risks a sudden drop in the dollar.
``The Japanese are just waiting,'' says a well-placed US official. ``They'll give him about two weeks to see if he really does something about our economic policies. They've been playing along with him at Treasury in this effort to manage the dollar, but they could cause an early crisis by letting the dollar fall.''
European exporters, the official says, have probably concluded that their export industries will not collapse if the dollar were to find its own level because Americans are buying up foreign products even when they are more expensive.
``There's no way to get the attention of the American political system but to provoke a crisis,'' warns the official. ``We're so hooked on foreign borrowing [to cover the budget deficit] that the only way to stop the addiction is cold turkey.''
The concern is that if the dollar begins to fall in the international market, the Federal Reserve Board will be forced to increase interest rates to hold investors, and this will act as a drag on the US economy.
BECAUSE everyone, including the President-elect, is aware of the deficit problem, it is certain to receive quick attention. Richard Darman, who will be Mr. Bush's budget director, is expected to find a way to reassure Wall Street and the stock markets.
A ``flexible freeze'' on spending, which Bush advocated throughout his campaign, would doubtless be part of any strategy, say analysts. This tactic holds down increases in entitlements and defense spending.
While entitlements are a politically sore subject, there is a gathering consensus within the government on the need to bring the spiraling defense budget under control. It extends to the corporate world as well.
``The best thing that has happened to our deficit problem is the earthquake in Russia because it exposes ... the fragility of the Russian infrastructure and shows how badly the people need funds and services,'' says one US financial expert. ``There is enormous pressure on Gorbachev to produce butter and not guns, and hopefully that will translate to the boys on Capitol Hill and take the throttle off defense spending.''
Additional revenue will be required, many economic analysts believe, because of growing demands on the spending side. The tottering savings and loans industry, for example, may need an infusion of $50 billion or more. It will take billions more to modernize the deteriorating nuclear weapons complex. Other needs include repair of bridges and highways, cleanup of hazardous wastes, and a stepped-up war on drugs.
Furthermore, Bush is expected to have on his platter of domestic priorities some social programs that fit in with his appeal for a ``kinder, gentler'' America. His campaign promises included a $2.2 billion program for child-care tax credits, a $400 million program of medicare coverage for poor children, and full funding of the McKinney Act program for helping the homeless.
Proclaiming his desire to be the ``education president,'' Bush during the campaign also backed more funds for ``national merit schools,'' magnet schools, and the preschool Head Start program.
``It's hard to imagine Bush will not move forward on his child-care proposal, medicare expansion for poor children, and Head Start for four-year-olds since that's what's on the `kinder, gentler' front,'' says Robert Greenstein, director of the liberal Center on Budget and Policy Priorities.
``There'll be disagreement on the Hill and within the Republican elements about child-care credits, but probably it can be worked out. It looks as if that will one of the priority areas,'' Mr. Greenstein says.
Although signing on for any tax raises would be difficult for Bush, analysts suggest there may be ``grey areas'' where the President-elect could accept compromise solutions. For example, he could make medicare payments mandatory for state employees, raising excise taxes, and raising the cap on taxation of social security.
``Bush could put together $10 billion to $15 billion without a gas tax, and by cutting defense a bit he could have $40 billion,'' says John Palmer, dean of the Maxwell School at Syracuse University. ``Putting forward a credible and effective plan for continued decreases in the deficit are absolutely essential ... His best bet is to put forward a bold deficit reduction package that would include tax increases, defense cuts, and cuts in the domestic area where cuttable - and show how the deficits will be on a downward path. Then there would be room for new initiatives.''
On the social front, economic analysts say, Bush will not be able to do a great deal if the initiatives require massive funding. But there are some areas where creative approaches could yield results.
In the field of housing, for instance, Jack Kemp, who has been named secretary of housing and urban development, is expected to bring energy and some dynamic thinking to the problem of the inner cities, perhaps by pushing private sector-government partnerships.
The Environmental Protection Agency, to cite another example, may adopt a more aggressive antipollution policy with William Reilly, president of the Conservation Foundation, at its head.