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He Urges National Sales Tax : Economists Like Babbitt Plan--but Few Others Do

January 25, 1988|JAMES RISEN and ROBERT A. ROSENBLATT | Times Staff Writers

DES MOINES — If economists were the only people allowed to vote for President, Bruce Babbitt would be the favorite to move into the White House next Jan. 20.

Economists worry a lot about the deficit, and they believe the former Arizona governor's proposed national sales tax--2.5% the first year and 5% after that--would raise big bucks toward closing the gaping deficit while leaving the economy relatively unscathed.

"It's the least disruptive to economic growth," said economist James Christian of the U.S. League of Savings Associations.

Babbitt's determination to make budget reduction the centerpiece of his campaign has forced many of the other Democratic candidates to propose programs of their own, ranging from oil import fees to tougher Internal Revenue Service enforcement. None of their plans have gained the acclaim that economists have accorded to Babbitt's--either they would not raise much money or they would jeopardize economic growth, according to the experts.

But for Babbitt, what is so attractive about him to economists is repellent to rank-and-file voters, who have rarely embraced higher taxes in any form.

More particularly, state and local officials, who depend heavily on sales taxes, do not want Washington dipping into this money pot. And Babbitt's sales tax is open to the charge that it is regressive--that it hits harder at the poor, who spend most of their money, than the rich, who can afford to save.

"I think Babbitt's sales tax is a Republican tax bill," one of his rivals, Massachusetts Gov. Michael S. Dukakis, said to applause here last week at the Brown and Black Coalition's presidential forum. "It's regressive, and I think we ought to reject it out of hand. Bruce has a lousy tax plan."

Babbitt fired back that his sales tax proposal "is better than your phantom tax bill."

Responsibility for this contentious debate among Democratic presidential candidates belongs to President Reagan, whose economic policies have reshaped the political landscape. He will bequeath his successor, Democrat or Republican, a low unemployment rate and low inflation--and a massive national debt created by a string of huge budget deficits.

Traditional Smorgasbord

No longer can Democrats offer their traditional smorgasbord of ambitious new government spending programs. The money is not there. Instead, the would-be presidents have become enmeshed in arguing about whose formula is best for reducing the budget deficit.

Since last October's stock market crash made millions of Americans edgy about the economic future, the deficit has become all the more important in the intraparty debate. The candidates generally agree on foreign policy, and they are unanimous on the need to protect social programs from further cutbacks.

To many economists, the deficit appears so big that only a hefty infusion of cash will provide a solution.

And this is where Babbitt has the advantage of specificity. His sales tax would generate big revenues, as much as $40 billion to $50 billion a year at a 5% rate. That would cut deep into the deficit, which was $148 billion in fiscal 1987 and expected to be at least that big in fiscal 1988, which began last Oct. 1.

Most other industrial nations depend heavily on sales taxes, as opposed to income taxes. "Eventually, the U.S. will move toward relatively greater reliance on consumption-based taxes," predicted Jerry Jordan, senior vice president and chief economist at First Interstate Bancorp in Los Angeles.

Long-Shot Candidacy

Babbitt is basing his long-shot candidacy on the fact that he is the only Democrat willing to "stand up" (which he does, literally, at televised debates) for dramatically increased taxes.

Although his willingness to call for higher taxes--born out of a calculated decision to gamble on risky, highly visible policies last summer when his campaign was going nowhere--has won him excellent press reviews, it has not translated into significant gains in the polls, either in Iowa or nationally.

The two front-runners in Iowa, Rep. Richard A. Gephardt (D-Mo.) and Sen. Paul Simon (D-Ill.), are attacking each other over the budget gap. But they have put forth programs that, most economists believe, would have much less chance of achieving meaningful deficit reduction.

Gephardt wants to cut the deficit by freezing defense spending, curtailing grain production to reduce farm subsidies, eliminating special tax breaks and levying an oil import fee.

Simon promises to save money by cutting military spending and persuading the Federal Reserve to cut interest rates, thus trimming the cost of government interest payments on the debt. He would bring in more money by promoting U.S. exports, which would create jobs and generate new tax revenues. Only as a last resort, he says, should higher taxes be levied on high-income individuals.

Simon Scores Gephardt

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