THE ``soak the rich'' element in the Clinton administration's tax bill is apparently doing its intended task: reducing the federal budget deficit.
When the tax measure was being debated before its passage last August, conservative critics held that it wouldn't work. For example, Harvard University economist Martin Feldstein was suggesting that the sizable hike in marginal tax rates for the well-to-do would prompt those taxpayers to lessen their income-producing efforts and shift their financial affairs to reduce their taxable income and perhaps generate even less tax revenue.
A mere 10 percent drop in taxable income for those hit by the tax hike would mean that ``the Treasury would collect only about one-fourth the revenue that would be collected if there were no behavioral response,'' the former economic adviser to President Reagan argued in a Wall Street Journal opinion piece.
But so far, according to Peter Yoo, an economist with the Federal Reserve Bank of St. Louis, the higher marginal tax rates have yielded higher revenues. ``Revenues collected are consistent with the projections by the CBO [Congressional Budget Office] or the OMB [Office of Management and Budget],'' Mr. Yoo says.
In fact, the CBO is now talking of a deficit in fiscal 1994 ending Sept. 30 of possibly under $200 billion. The OMB last month trimmed its 1994 deficit estimate to $225 billion. Last February, President Clinton was forecasting a $234.8 billion 1994 deficit, down from $254.7 billion in fiscal 1993.
When Mr. Clinton joins the Economic Summit in Naples, Italy, this weekend, he will be able to boast that the United States deficit as a percentage of total national output will be less than that of any of the Group of Seven industrial democracies except for Japan. The US deficit will be about 3 percent of gross domestic product this year. A Merrill Lynch forecast puts the US deficit in 1995 at 2.3 percent of GDP compared with 5 percent for Germany, 5.4 percent for France, 7 percent for Italy, 5.3 percent for Britain, and 4.1 percent for Canada.
Stanley Fischer, who is joining the International Monetary Fund as a top executive, describes the US deficit as ``not bad.'' Though the $200 billion deficit may still appear huge, it means that the country's outstanding federal debt will stabilize as a percentage of national output, the Massachusetts Institute of Technology economist notes.
In other words, the debt burden for the nation will stop getting worse, as it has been doing since Mr. Reagan's first term.
Economist Yoo's analysis, which he admits has limitations, is based on the first seven months (through April) of fiscal 1994. In that time span, the deficit fell 23.8 percent relative to the first seven months of fiscal 1993. The drop reflects an increase in revenues of 8.8 percent, while outlays increased only 2 percent. In January of this year, the CBO forecast that revenues would increase 8.5 percent and outlays 4.7 percent.
For reasons not entirely clear, Washington spending has been more modest than anticipated this fiscal year. Revenues have been strong partially because the economy is doing well. GDP has grown at a 5 percent real annual rate since passage of the tax bill.
A portion of the 6.2 percent increase in individual income tax receipts for the first seven months of fiscal 1994 reflects a 4.9 percent rise in personal income for that period. The fact that individual tax receipts grew faster than personal income hints that the well-to-do have not been able entirely to avoid paying the higher marginal tax rates, Yoo notes.
A more certain conclusion may need to await Internal Revenue Service analysis of individual tax returns some years away.
Continued cuts in the budget deficit hangs on continued economic expansion, economists agree. A survey of 58 economists by the Wall Street Journal finds that on average, they expect the annual real GDP growth rate to drop from 2.9 percent in the first half of 1994 to 2.6 percent in the second half.
The Federal Reserve's interest-rate hikes since February were intended to cause such a slowdown - a Fed move that Leif Olsen, a New Canaan, Conn., money manager, describes as ``experimental.'' It creates some risk that the slowdown could become a pause or worse. ``Playing experiments with the condition of the economy is not a light matter,'' he says.