Do-it-yourself deficit cuts: some ideas, an invitation to readers
Boston — Beware of candidates in the summer of an election year. They are apt to be test-marketing slogans and strategies to see what will work in the fall when things get more serious.
A lot of exaggerated claims are launched. Fortunately, much of the public has been at the beach or watching that other quadrennial event, the Olympics, and paying little attention to the preliminary heats of the political high hurdles. But even a voter at the beach knows that this year's test-marketing involves some wild charges and countercharges on deficit-cutting and tax-raising.
Those issues are very serious. They affect the future of American society more acutely than any economic matter since Lyndon Johnson's Vietnam-and-butter budget or perhaps the oil shock. But voters will not be shirking their civic duty if they tune out until the candidates begin to talk budget specifics.
At the moment neither Mr. Mondale or Mr. Reagan has come anywhere near doing so. Those two usually sensible men - and much of the campaign press corps - are caught up in a fruitless game of trying to prove each other liars about taxes.
While they and their handlers joust, let's turn off the TV reports on their battles and take a simple look at the deficits and what to do about them.
To clear the landscape we might first try to answer two basic questions:
Can the economy grow its way out of the deficits, as Mr. Reagan implies?
No. The extraordinary Reagan recovery, stimulated by tax cuts, has produced more growth (and more tax revenues) than many economists expected. The new businesses created by that stimulus have created most of the 5.4 million new jobs that have brought about a remarkable reduction of the unemployment rate. But even this striking growth surge will not produce enough new revenue to close the $160-to-$200 billion gaps that threaten the economy over each of the next four years. We couldn't manage both guns and butter (Vietnam and Great Society) in the Johnson years. We can't manage both guns and butter (defense buildup and income tax cuts) now. And if we do little or nothing about deficits, interest costs on the national debt could rise by as much as 50 percent as a portion of gross national product - cutting into the next generation's ability to pay for either butter or guns.
Can Mr. Mondale cut deficits by two-thirds in four years while not making ''defense cuts that weaken our security,'' not touching social security, protecting labor and farm income, and not adding ''business taxes that weaken our economy'' - all of which he pledged at the Democratic convention?
No. Even though those Mondale phrases about defense and business taxes are purposely vague, some of the nation's most painstaking economic forecasters have put through their computers different variations on what Mondale appears to mean , and found they come up wanting. They don't add up to a two-thirds reduction. They appear to add up to just-as-big deficits.
All right then, if you're going to cast doubt upon the chosen champions of the two great political parties, tell us what you think would work. Then watch the candidates' staffs pick that apart.
OK. Here's one of several variations:
First, slow the rate of the defense buildup. An increase of 3.5 percent a year, inflation-adjusted, for the rest of the decade would permit an orderly buildup. Perhaps even less haste-makes-waste cost overruns. Remember, that's 3.5 percent a year - 3.5 percent compounded. So it doesn't totally shortchange defense, just puts it on a gradually increasing curve. The acceleration could be increased if talks with Moscow go nowhere, decreased if there is some success. Savings: about $47 billion over three years, according to Data Resources Inc., the nation's biggest private economic research organization.
Second, accept what is called ''the 21/2 percent solution.'' That involves a shaving back of 21/2 percentage points below the rate of inflation when figuring the annual rise in social security, medicare and other ''transfer payment'' benefits. It also involves a similar shaving back of 21/2 percentage points in figuring indexing of income tax brackets. ''Bracket creep'' would not be halted in its tracks, as planned, but it would still advance more slowly than it has in the past decade. Savings: $20 billion over three years in reduced social security increases. Some $23 billion over three years on tax indexing trims.
Third, adopt a ''manufactures tax.'' This approach should be taken in lieu of the more comprehensive national sales tax or value-added tax. It could be carefully shaped to be as fair as possible to all economic groups. One version, called a Tax on Business Transactions (TBT), was researched by Margo Thorning at the American Council for Capital Formation. TBT taxation would exclude all retail sales (thus avoiding collision with states that collect sales taxes, and also avoiding taxation of basic foods). It would exclude personal services, health and education services, real estate, and financial and insurance transactions. Ms.Thorning reports that such a tax at the minimal rate of 1 percent would bring in $8 billion in fiscal 1984 and, respectively $8.4, $9.2, $ 9.9, $10.7, and $11.5 billions in years 1985 through 1989. At 2 percent the amounts would double; 3 percent triple; etc.
Another version of the manufactures tax is being studied by moderate Democratic leaders in Congress. At least one of them has discussed it with Mondale. This Democratic version would apply only to a limited range of manufactured products - not services - with food, clothing and health care exempted. It would probably take in slightly higher revenue than the TBT version.
Finally, it should be said that no plan to close the gap on deficits will sell well unless it is combined with some effort at tax simplification. If, as Oliver Wendell Holmes said, ''taxes are the price we pay for civilization,'' the paying of them ought to be much more civilized.
Fairness of sacrifice should be a measuring stick any time Americans have to pull in their collective belt for a few years. These programs mentioned above are picked with that in mind. And also with the idea that the belt tightening should not choke off capital formation. For, as we have seen time after time, capital formation and investment lead to millions of relatively permanent new jobs, replacement of old plants and industrial processes, more productivity, more trade, and eventually a higher standard of living.
Some proposals should probably be adopted at a moderate percentage rate, possibly with a declining percentage built into the legislation. That way they would be seen as experiments, designed to wipe out current megadeficits, not to be habit forming. If such a tax proved to be generally supported, it could be renewed at a fixed rate without expiration date.
The shaving of income tax indexing and cost-of-living increases in social security and other entitlement programs should also have an end date attached - perhaps the last year of the decade. If the need for further 21/2 percent restraint is still apparent, a new Congress should have to face voters and explain the need.
As the economists at Data Resources wrote when they contrived a deficit reduction package last spring: ''Unfortunately there is no painless way to reduce the projected stream of budget deficits. . . . But the alternative is an economy in which investment for the future is increasingly held hostage to current consumption. ...''
If you have some better ideas, dear taxpayer, after slogging through this batch of plans, please send them in. With a few exceptions, none of you are running for the presidency. So we might expect some practical plans and a willingness to be far more specific than the candidates.