Shaping taxes to encourage more saving
Washington — ''We must have tax increases,'' says Alice M. Rivlin. ''But the real question is - how to design them with the least damage to economic recovery?''
The aim, said Dr. Rivlin at a breakfast meeting with reporters, ''should be to structure the tax system to encourage, not discourage, savings and investment.''
If this sounds like supply-side advice coming from the director of the Congressional Budget Office (CBO), it is. But she would tackle tax reform somewhat differently than President Reagan did, with his three-year, 25 percent, across-the-board cut in income tax rates.
Dr. Rivlin would not undo what Mr. Reagan and Congress have done. Delaying or eliminating the third year of the income tax cut, scheduled for July 1, 1983, ''is not high on my preference list,'' she said.
Such a move, in her view, would be regarded by taxpayers as a boost in their income tax and would tend to discourage savings and investment.
Dr. Rivlin said a better solution might be to devise a system that rewards taxpayers for saving money, by allowing them to deduct from taxable income a certain amount of savings.
A start in that direction was made last year, she notes, by a provision of the 1981 tax law allowing taxpayers to deduct from taxable income up to $2,000 - or $2,250 for husband and wife - put into an individual retirement account.
The CBO's total agenda for whittling down budget deficits embraces not only tax increases of some kind, but also cuts in the growth rate of spending for defense and entitlement programs, including social security and medicare.
Without such changes in tax and spending laws, says Dr. Rivlin, a ''structural deficit'' is built into the federal budget, with shortfalls foreseen of at least $155 billion each year through fiscal 1985.
Like most forecasters, experts of the CBO are paring down their estimates of how quickly economic recovery will come and how robust it may prove to be.
The consensus of most economists, including those of the CBO, calls for recovery next year at a rate of 3 percent or less - slower than the White House projects and slower than most recoveries since World War II.
A growth rate of 3 percent might keep unemployment from creeping higher, but would do little to put many Americans back to work. Currently the nation's jobless rate is 10.4 percent, the highest level of unemployment since 1940.
Experts generally agree that the so-called ''full employment'' level has moved upward in recent years from the old norm of 3 to 4 percent unemployment to 5 or 6 percent. This means that stimulating the economy to reduce unemployment below 5 or 6 percent would threaten to reignite inflation; as the government tries to stimulate the economy, workers start to bid up their wages. Firms then raise the price of their products to compensate for increasing labor costs.
Seldom will a new Congress have faced up to so many controversial and complex issues as the freshly elected crew of legislators that assembles in Washington at the beginning of next year.
Programs to create jobs, social security reform, tax increases, the level of defense spending - all these are matters on which reasonable people of both parties have widely differing views.
Lawmakers and the White House will work against a somber backdrop of economic conditions. Deficits, without changes in law, may soar. Unemployment is expected to remain stubbornly high.
Inflation and interest rates provide a spark of light amid the gloom. Both are down substantially. The task of policymakers will be to devise measures to cut deficits and the jobless rate without setting new brush fires of inflation and driving interest rates up.
For years to come, meanwhile, the nation will wrestle to achieve structural changes in an economy that more and more is shifting from old-line manufacturing to a services base.