As deficit grows, whispers of a tax increase get louder
Washington — It's no longer unmentionable. As the huge federal deficit persists, more and more talk is heard about the need for a tax increase.
Some in the Senate back the idea. The House leadership has also made noises. And Budget Director David Stockman is on record as saying that tax increases may be the only way ``consistent with sanity'' to cut the deficit.
President Reagan remains publicly opposed to any tax hike. But even he appears prepared to accept some revenue boosting, provided it is combined with, and does not replace, sharp spending reductions.
The disturbing deficit figures hang on. The budget deficit for fiscal 1985, which ends Sept. 30, will exceed $200 billion. That means the national debt will have swelled by more than $800 billion under the Reagan presidency. The total debt will come to about $1.825 trillion at the end of the year.
Moreover, $200 billion-a-year deficits are expected to linger through the next decade.
Economists worry that in the short term the Federal Reserve Board will be under growing pressure to print money to pay the debt, which would spur inflation. Over the longer term, they say, unless the trend is reversed the US will gradually lose control of its own economy to foreigners, whose investments are increasingly needed to cover the deficits.
``We are selling ourselves to foreigners to come and buy chunks of the US economy, which means we will accumulate large obligations to pay abroad,'' says Henry Aaron, a tax specialist at the Brookings Institution. ``The benefits of investment will not accrue to American citizens, but to people abroad.''
Mr. Aaron says that a tax increase always should have been part of the deficit-reduction agenda. That, in turn, would make it easier to get tax reform. As it stands, the President's tax-overhaul plan is expected to result in a loss of revenue, adding to the deficit even more. It may well be sidetracked for that reason.
Concerned about that possibility, the President is pouring pressure on Congress to resume the stalemated budget negotiations. This week he is holding meetings with House and Senate budget conferees and GOP leaders to see if the impasse in the conference committee can be broken and some budget savings achieved.
One idea the administration is warming to was floated by House Speaker Thomas P. O'Neill Jr. but has since been shunned by other Democrats. It would tax 85 percent of the social security benefits of upper-income recipients -- that is, individuals earning more than $25,000 a year and couples with incomes of more than $32,000. Presently, 50 percent of these earnings are taxed.
This plan -- delicately called a ``benefits recapture,'' not a tax increase -- would raise an estimated $8.3 billion over three years. ``It's an interesting idea,'' says Edwin Dale, spokesman for the Office of Management and Budget. ``We did not put cold water on it.''
Mr. Dale says this could be combined with two revenue-raising ideas proposed by Senate majority leader Robert Dole. One would be to bring new state and local employees under social security. The other would be to require all state and local employees to take medicare coverage. These two reforms would also raise about $8.3 billion over three years.
Together, the O'Neill and Dole proposals would achieve about $17 billion in deficit reductions over the next three years.
Meantime, six of the nine Senate conferees, three Democrats and three Republicans, have proposed $59 billion in new revenues over three years, with a view to reducing the fiscal 1986 deficit by about $70 billion. The House and Senate budgets call for a trim of roughly $56 billion. The White House, however, has rejected the idea.
Many economists believe that tax increases will be needed if the Stockman numbers are right. In an off-the-record dinner speech June 5, Mr. Stockman blamed both the administration and Congress for using questionable figures to calculate the budget deficits.
The Senate plan, he said, rests on ``some pretty optimistic assumptions'' about the course of the economy in the next three years -- namely, 4 percent growth, a steady inflation rate, and declining interest rates. But the outlook is not that rosy, he indicated.
If the nation's 50 leading business forecasters are correct, Stockman said, there will have to be even more spending cuts or ``an acknowledgment that a last-resort tax increase is in order.'' He assailed the House plan even more sharply, saying it would cut spending by only $10 billion instead of the $56 billion claimed.
Economists caution that the process of reducing the gargantuan budget deficit should be a gradual one in order to avoid depressing the economy.
``If you cut the budget deficit too much or have a big tax increase, you will bring down the economy,'' says Murray Weidenbaum, former economic adviser to the President. ``You want to reduce the withdrawal pains.''