Two Cheers for the Budget

THE immediate reaction to the deficit-reducing package passed last weekend by Congress has been to assess the political fallout from the new law. Which party won? Has the president, in allowing taxes to be even slightly increased, hurt himself with his constituency? Given the fact that mid-term elections are only a week away, this concern is understandable. But what is of more interest to us citizens than partisan gains or losses is: What does this mean for the nation? And in that discussion, at least four points leap to mind:

First, at last the budget debate has moved off dead center. For too many years the United States has refused to face up to economic realities. It has allowed foreign investors to finance its deficits, year by year weakening the long-term economic position of the country. The irresponsibility can be laid to both parties, but most particularly to President Reagan, who knew he could, and said he would, block a tax increase if Congress were to pass one.

Whatever the short-term economic advantages were in having a decade of uninterrupted growth, they were probably more than offset by the means by which that growth was financed. Moreover, the growth was reflected too largely in a bloated consumer binge instead of in a proper balance of corporate investment in business assets that would contribute to increased future production.

Second, the fact that one party has controlled the White House and the other the Congress has not been helpful to making policy decisions. However, President Bush has now shown himself to be more flexible than his predecessor, and one can hope that he will not be swayed from this strategy by its possible short-term political costs to his party. The fact is that whenever major policy changes are made, there is bound to be disagreement. Republicans do not all agree with each other; neither do Democrats.

Divided leadership does make the process more difficult; but this experience has shown that it is not impossible. It would be an interesting experience to have a president and Congress from the same party again, but this would not eliminate all disagreement.

Third, the big debates have been postponed. The major categories in the budget - defense spending and social expenditures including Medicare - need more attention. Iraq has merely delayed larger changes that need to be made in defense spending. And the social side of the budget, particularly the cost-of-living automatic adjustments, needs to be reconsidered. If the social spending side of the budget cannot be shrunk, the two obvious alternatives must be resolved: major cutbacks in our military commitments or still higher taxes.

Fourth, the restoration of a capital gains differential is a major victory for the people. It may not seem so, since the differential (28 percent against a top income tax rate of 31 percent) is so small. Too large a price was paid for the so-called Tax Simplification Act in 1986, when President Reagan agreed to eliminate the capital gains differential.

While the arguments for taxing gains on capital at a lower rate (or not at all!) are strong, they are not well articulated. It is easy to be against the rich. Yet the formation of adequate capital is a major concern for the United States at the present time. If, in future years, income taxes need to be raised again - and there is a strong likelihood they will be - it will become even more important to maintain the difference between these two kinds of income. Capital gains could eventually be taxed lower - at, say, 20 percent - or adjusted for inflation, or taxed at differential rates depending on the length of the holding period. But at least a first step has been taken, as a result of the hard bargaining at the end of the process, to recognize the differential again.

The logjam of pretense is broken. What has been done may be insufficient. But it is an important first step in facing up to present economic reality.

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