Critic sees tax flaws in both political camps
Boston — ''Zip-a-dee doo-dah. Now it's off to the races.'' That was Vice-President George Bush's remark to a reporter after answering questions on the tax issue, and consultant Lawrence Kudlow figures he got it right.
Neither the Republican nor the Democratic candidate, says the former chief economist at the Office of Management and Budget (OMB), has a financial plan ''to create some long-run discipline'' and solve the budget deficit.
Although he worked for the Reagan administration, Mr. Kudlow doesn't believe any Republican promise that there will be no increase in taxes in 1985, '86, or '87. He uses the word ''phony'' for any such pledge, figuring that President Reagan will have to use his ''last resort'' - some sort of tax increase - to reduce the deficit.
Indeed, he wishes the administration actually did have a ''secret plan'' for raising taxes, as Walter Mondale charges. ''The administration has no secret plan to do anything,'' he says.
Mr. Mondale bravely admits to the need for a tax increase, but his suggested program would be inadequate to wipe out the deficit, Mr. Kudlow says. He will also have to cut spending, Kudlow calculates, and he hasn't spelled out any sensitive details as to what programs would face the ax. His staff is reported to be struggling with a plan.
In a phone interview and a report for clients, Kudlow spells out some of the budget ''facts'' as he sees them.
First, the root cause of the deficit problem is ''excessive federal spending'' - not tax reduction. Including off-budget spending, federal expenditures have grown as a share of the nation's total output of goods and services from 20.4 percent in 1972, to 22.7 percent in 1976, to 22.9 percent in 1980 when Jimmy Carter left office, to an estimated 24 percent this year. Restraint on civilian spending was more than offset by boosts in defense outlays.
Mr. Reagan, though talking about reducing the size of government, has enlarged it.
On the other side of the balance sheet, tax revenues have been remarkably stable during the 1968-84 period. During the Carter administration, taxes went up by some 1.9 percent of gross national product (GNP) to 20.1 percent in 1980. They came down again to 18.7 percent during the Reagan administration, to the approximately 18.5 percent trendline of the past 16 years.
''If Reagan's budget in 1984 maintained the same fraction of GNP as Carter's 1980 budget, then fiscal year 1984 spending (ending Sept. 30) would be about $41 billion less, and the 1984 deficit would be about $134 billion instead of $174 billion,'' Kudlow says.
''Going back to 1972, when the tax burden was nearly identical to 1984, if spending was maintained at 20.4 percent (of GNP), then the 1984 Reagan deficit would be only $59 billion instead of $174 billion.''
Mr. Kudlow reckons that the Congressional Budget Office (CBO) midyear assessment of the federal budget is more realistic than that of his old office, the OMB. The largest difference between the two deficit projections falls in the area of interest-rate assumptions, with the OMB showing three-month Treasury bill rates falling to 5.1 percent by 1989.
''As any New York City cabdriver will tell you, this is a ridiculous forecast ,'' Kudlow asserts. He believes even the CBO forecast of T-bill rates falling to 8.9 percent in 1989 is unrealistic.
Nonetheless, accepting the CBO forecasts, he calculates that taxes would have to be raised by something like $233 billion by 1988 to balance the budget if spending then remained at 24 percent of GNP.
''Not even Mondale is proposing this sort of increase, and the Congress would never rile the American voters with this sort of action,'' he says.
He figures either Reagan or Mondale will have to come up with a ''balanced'' package of cuts in both the civilian and defense areas as well as tax increases.
If the 1988 budget were balanced with spending at 22.5 percent of GNP, taxes would have to rise by $157 billion and spending fall by $86 billion from the current trend. Those figures, combined, are far larger than the $63 billion deficit-reduction down payment that became law in this year's tax bill.
(Congress talks about a $150 billion down payment, but left some measures for later, and Kudlow doubts it will act on them in the session after the election.)
Both candidates have promised to preserve ''entitlements'' such as social security and medicare benefits. So, Kudlow concludes, ''meaningful domestic spending restraint becomes impossible.'' Mondale talks of cutting defense, but the amount in this area could not fill the deficit gap alone, this former OMB official says. Further, he says Mondale's special-interest domestic spending proposals would more than wipe out any defense-spending cuts. White House officials have leaked a $135 billion-to-$150 billion price tag on those proposals; CBO ''green-eyeshade types'' have said $125 billion. Mondale himself, however, has been vague about his spending plans and calls such numbers inflated.
Reagan often speaks about eliminating waste, fraud, and abuse, citing the Grace Commission proposals. But Kudlow holds that these proposals refer principally to major policy changes in retirement plans and other entitlements which Reagan has fenced off. He describes Grace's management reform recommendations as meaning ''only a few pennies of budget reforms.''
In fact, he notes, the latest Reagan budget estimates project a $180 billion deficit in 1987.
That, Kudlow says, ''is a non-plan. It suggests that government is incapable of dealing with its own finances. There is no political will and no economic foresight.''
Mr. Kudlow concludes: ''We are living in a fool's paradise.''