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Among Candidates' Theories on the Deficit, the Best Must Be Yet to Come

February 14, 1988|Robert Lekachman | ROBERT LEKACHMAN is professor of economics at Lehman College of the City University of New York and author of "Visions and Nightmares: America After Reagan." and

In addition to public apathy and combat fatigue among participants, the endless debates among Democratic and Republican presidential aspirants have generated quite a few dreadful proposals for curing for the federal and trade deficits.

Rep. Richard A. Gephardt's trade bill, despite a number of reasonable elements, is, as generally charged, protectionist. No sensible soul ought to ignore the near certainty that its enactment and passage over an expected veto by President Reagan--happily, an unlikely series of events--would set off a round of retaliation and counter-retaliation at least as disastrous for us as for our trading partners. The principal reason we do poorly at selling domestic goods at home and abroad is the general public perception that Japanese, West German and other foreign consumer goods are higher in quality and less subject to defect than their made-in-America rivals. The challenge to our overpaid chief executives is to shift their attention from financial maneuvering and the delights of mergers and acquisitions to factory workplaces and labor-management relations.

Regressive Tax

The three-year budget-balancing plan of Illinois Sen. Paul Simon requires simultaneous reductions of unemployment and interest rates without recognition of inflationary consequences or the need for some sort of price and wage controls to mitigate those consequences. Just to make matters worse, the good senator, running as a self-proclaimed liberal, supports a balanced budget amendment calculated to sabotage his worthy plans to increase federal spending on health, jobs and education. Unkindly but accurately, Missourian Gephardt labeled Simon's scheme Reaganomics with a bow tie.

Then there is former Arizona Gov. Bruce Babbitt's endorsement of a 5% national sales tax. Sales taxes collect large revenue. They are also inflationary and, worst of all, highly regressive. The lower a family's income, the more of it will be spent on items subject to tax.

The 1986 tax reform did relieve 6 million families of income tax liability. However, the steady escalation of Social Security levies, another regressive tax, subjects larger numbers of low-income, working families to higher effective rates of taxation than those imposed on the affluent. A sales tax would further damage them. Babbitt has been getting favorable press coverage as a man of ideas. I hope some of them are better than this one.

In this company, Massachusetts Gov. Michael S. Dukakis is a minor offender. He plans to balance the budget by stricter tax enforcement. He cheerfully expects to collect an additional $90 billion annually from tax dodgers. Good luck, Mike.

The Republicans merit equal time. Former Delaware Gov. Pete (a.k.a. Pierre) du Pont favors private savings alternatives to Social Security. Predictably, high earners would opt out of Social Security and ordinary wage slaves would remain within the system. The finances of the Social Security system, now extraordinarily healthy, would suffer. Worse still, Social Security would soon be stigmatized as welfare, a word of calamitous political import.

As Congress has amply demonstrated in this dreadful decade, it is far easier to cut food stamps, low-income housing and Medicaid than it is to close an unneeded military base or cancel a redundant weapons system. In our fragmented polity, Social Security up to now has been one of the few institutions that ally rich, middling, and low-income Americans. Transformation of Social Security into benefits for the poor would make it as vulnerable to erosion as other attempts to improve the condition of vulnerable Americans.

Once upon a time, Vice President George Bush uttered the only words of his that anyone remembers, aside from his recent confrontation with Dan Rather. Seven years ago, in his unsuccessful contest with Ronald Reagan for the Republican presidential nomination, he memorably described supply-side theories as "voodoo economics." His new rival, Sen. Bob Dole of Kansas, used to joke that he had good news and bad news: The good news was that a busload of supply-side economists had plunged over a cliff; the bad news was that there were two empty seats on the vehicle.

In 1988, Bush proposes to cut capital gains taxes from 33% or 28% to 15% and assures skeptics that the Treasury will collect more income from lower than from higher rates. Supply-side economics lives in the vice presidential heart even though it is almost universally discredited elsewhere.

Reopening Debate

Quite aside from the revenue implausibility, cutting imposts on capital gains is a highly mischievous notion.

The painful negotiations among the writers of the 1986 act were successful because liberals and conservatives each got something they badly wanted. The liberals won tax relief for low-income families and closure of a good many tax shelters of prime benefit to the wealthy. Conservatives got the lower marginal rates on income for which they had been ceaselessly clamoring. All parties proclaimed victory.

Reopening the bill would start the argument all over again. Preferential rates for capital gains would not only cost money and increase the deficit, they would also revive many ingenious schemes for converting ordinary income into capital gains. The effect would be to diminish the exceedingly mild progressivity of our current income tax schedules.

I salute the candidates who have been vague or silent about their plans to salvage the economy. At least potentially, they are wiser than those who have spoken.

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