Bush sits well with economists, but his approach to the deficit gets a neutral rating at best
WHEN Blue Chip Economic Indicators asked more than 50 economic forecasters which presidential candidate would do the most to eliminate federal budget deficits, only 51 percent of those replying chose George Bush; 49 percent said Michael Dukakis. This close call is surprising, because 69 percent of these economists stated Mr. Bush should win; 96 percent held that he would do more to reduce the size of government; and 83 percent figured he would achieve greater price stability.
In other words, most of this panel of mostly business/financial economists clearly favor the Republican candidate. But they aren't so sure he will properly tackle the deficit, especially after that ``read-my-lips'' promise not to raise taxes.
Lawrence Summers, a Harvard economist who is advising Mr. Dukakis, tried to add to such doubts in a talk to a group of Boston business economists last week. His remarks neatly summarize the Democratic budget position.
The Bush budget plans, he said, are ``dangerous.'' This is because the United States national savings rate is so low - 2 percent in 1986 and '87, or one-eighth that of Japan and one-third that of the US in the 1970s. Savings are needed to provide for the future. The most potent and reliable way to boost savings is to reduce budget deficits, since these have eaten up two-thirds of private savings over the last five years.
Continuing, Dr. Summers charged Bush with both minimizing the deficit problem and relying on an impractical ``flexible freeze.'' About 70 percent of the budget, including defense spending, social security, and interest payments, would be exempt from this freeze in terms of constant dollars. So the burden of any spending cuts would fall on everything else, including medicare, national science programs, the White House, Department of Interior, etc.
Such a freeze assumes no new spending. During the campaign, though, Bush has proposed eight new tax incentives. Most such tax breaks reduce revenues. Bush says his would boost them. Summers says they might together cost $20 billion to $25 billion a year, ``enough to blow the flexible freeze right out of the water.''
Summers adds that Bush's plan to cut the capital-gains tax from 30 percent to 15 percent would primarily benefit the rich. Moreover, he says, it wouldn't do much to stimulate capital spending or add to revenues, as Bush asserts. Summers notes that only 30 percent of capital gains goes to corporations. Most of the gains arise from tax shelters and price gains on Persian rugs and other such collectibles.
Tax shelters, he notes, are primarily set up to switch an individual's earnings from regular income to capital gains. If capital-gains tax revenues go up, probably on a one-time basis as taxpayers take advantage of a lower rate, it likely means that regular income tax revenues go down. The Joint Tax Committee of Congress estimates an overall loss of $15 billion a year.
Bush has ruled out rises in income taxes and any increase in taxes on cigarettes or payrolls (social security). He attacked the Dukakis plan to boost revenues by collecting taxes owed but not paid. ``It is hard to see how a candidate could position himself worse on dealing with the deficit,'' says Summers.
The Harvard economist concedes that Dukakis has not provided a detailed budgetary blueprint. But he says Dukakis has at least identified specific cuts in some defense weapon systems, ``star wars'' (the Strategic Defense Initiative), and health care reimbursement. He plans to restore the percentage of audits of taxpayers merely to the 1970 level - ``not some tax-police state.'' Additional Internal Revenue Service auditors usually bring in revenues equal to eight times their salaries. He regards as plausible the estimate of three former Internal Revenue Service commissioners that tighter enforcement of the tax laws could produce an extra $100 billion in revenues over five years.
Summers says he is ``optimistic'' that a Dukakis administration won't ``start spending.'' He acknowledges that Dukakis has not ruled out tax increases if necessary to avert a decline in the US economy or the danger of a major financial problem. He hinted at further closing of tax loopholes.
``It is not a matter of what is popular,'' he said. ``It is a matter of what is necessary.''