Weighing the impact of Mondale's deficit plan
Washington — Private economists are poring over Democratic presidential hopeful Walter Mondale's plan to chop $177 billion from the federal deficit by fiscal 1989. Their early assessments of his proposal, which includes $85 billion in new corporate and personal taxes, suggest:
* It is based on assumptions for economic growth, inflation, and interest rates that are more realistic than the Reagan administration's August budget update. But Mr. Mondale's plan still assumes ''strikingly good economic performance,'' notes Donald Straszheim, vice-president of Wharton Econometric Forecasting Associates. The Mondale camp assumes that by 1989, the interest rate on 91-day Treasury bills will be 7.5 percent and the unemployment rate will be 5 .8 percent. It also predicts that over the next five years, inflation will average 4.8 to 5 percent, while inflation-adjusted economic growth averages 3.5 percent a year.
* The plan's stiff tax hikes, if enacted, would risk pushing the economy into a recession. The risk is especially great if all the tax increases take effect in the spring of 1985, as the Mondale camp proposes, economists say. The potential recession could push up deficits before bringing them down, notes Donald Ratajczak, director of the Georgia State University Economic Forecasting Project. Due to tax-law changes, however, the deficits would fall at a faster rate in the next recovery than they have in the current one, he says.
* It relies heavily on new taxes. Almost half of the deficit reduction scheduled for 1989 - some $85 billion - would come from tax increases that would be very difficult to enact.
* It will affect the average family's finances - its taxes and its shopping bills - in ways not fully spelled out in the proposal. Economists note that individual taxpayers will eventually feel the effects of the corporate tax hikes Mondale proposes, either in lower wages, higher prices, or reduced stock dividends - many of which are paid to pension plans.
''Nobody pays taxes but people,'' notes Bernard M. Markstein III, senior economist at Chase Econometrics.
''This budget is sound from an economic point of view,'' argued Richard K. Leone, a senior adviser to the Mondale campaign, at an early-morning press briefing on Monday.
Later that day, President Reagan said Mondale's plan ''is nothing new. He told us several weeks ago he was going to raise the people's taxes, and now he's repeating it.'' Vice-President George Bush said: ''I think what it apparently does is undercut the spending pledges he has made.''
Mondale's package expands on a deficit-reduction plan he proposed last January, as the Democratic presidential primary campaign gathered momentum. That plan was designed to cut the deficit in half by 1989. At the Democratic National Convention in San Francisco in July, Mondale pledged to cut the deficit by two thirds by '89. Mondale's revised plan projects deficit cuts of $177 billion in a 1989 deficit, which otherwise would be $263 billion. Savings would come from net spending cuts of $24 billion, $51 billion in reduced interest expenses on the federal debt due to smaller deficits, $85 billion in higher taxes, and $17 billion in higher government revenues and lower spending due to stronger economic growth. The result would be an '89 deficit of $86 billion, or 1.6 percent of the gross national product (GNP) - the output of the US economy. The Congressional Budget Office estimates that the fiscal '84 deficit will account for 4.8 percent of GNP.
The largest single spending cuts come in defense.
By reducing inflation-adjusted growth in the Defense Department's budget authority to 3 to 4 percent and canceling the MX missile and the B-1 bomber, Mondale's economists expect to save $25 billion.
A cost-containment program is expected to yield cuts of $12 billion in health care, and $5 billion in savings is expected from improved government management.
Although Mondale proposes $54 billion in spending cuts, roughly $30 billion of that is eaten up by new spending to offset Reagan administration budget cuts in education, health, environment, and other areas.
Roughly $46 billion of the new taxes Mondale seeks would come from individuals.
He proposes deferring indexation of income taxes for families reporting $25, 000 or more of adjusted gross income. As a result of Mr. Reagan's 1981 tax-cut bill, personal exemptions and tax brackets are scheduled to be indexed for the effects of inflation, starting in 1985. Without indexing, a family can be pushed into a higher tax bracket as inflation lifts its income but not its real spending power.
Taxes on family incomes of less than $25,000 would be completely indexed. A family of four with more than $25,000 in income would be indexed only to the extent that inflation exceeds 4 percent.
Under Mondale's plan, only the first $60,000 in adjusted gross income for a married couple and the first $45,000 in adjusted gross income for single persons would be eligible for the final 10 percent of Reagan's three-year tax cut. This installment took effect this year. Single persons with adjusted gross incomes of more than $70,000 and married couples earning $100,000 or more would pay a 10 percent surcharge.
Because the median family income in the US in 1983 was $24,580, more than 50 percent of the people would not be affected by Mondale's plan, Mr. Leone said. Half of all families make more than the median and half make less.
The wealthiest 14 percent of US families, those with adjusted gross incomes of more than $60,000, would pay 75 percent of the increased tax bill, campaign aides say.
Private economists, however, note that the $25,000 cutoff is not indexed. Thus, over time, inflation will lift more families into higher income brackets, where they will face higher taxes, although Mondale's plan does not spell this out.
The Mondale campaign also advocates raising $25 billion by 1989 through imposing a 15 percent minimum tax on corporate economic income and by limiting unspecified tax shelters, loopholes, and alleged accounting abuses. Better tax-law enforcement is counted on for $10 billion in new revenue, and a continued postponement of tax cuts delayed by 1984 tax legislation is expected to bring in $4 billion.