The U.S. Is Running Out of Money

THE BUDGET

When President Nixon presents his election-year budget this month, it will be relatively bare of those shiny new social programs that stir voter enthusiasm. In that lack lies a harsh truth: despite prospects for a strong, sustained economic recovery, ever-rising federal expenditures and a long series of tax cuts have left the Government strapped for ready cash. As a result, the Administration faces some tough choices. It must either raise taxes, cut current expenditures, or go slow in meeting a growing plethora of public needs, including benefits for Viet Nam veterans, pollution control, mass transit, prison reform and aid to ailing cities.

All the tax revenues now due the Government are needed just to meet the cost of present commitments. The predicament is reflected in Nixon's efforts to create programs without money in his fiscal 1973 budget, which takes effect July 1. By the most optimistic estimates, fiscal 1973 revenues are not expected to rise above $235 billion, or about $32 billion more than in fiscal 1972. With about $14 billion set aside for reducing the budget deficit, that leaves roughly $18 billion more to spend than in 1972. But practically all this additional income is already earmarked: $8 billion for existing pro grams, $3 billion for a Government employees' pay boost, $4 billion for increased Social Security benefits, $2 billion in aid to cities and states, and a down payment of $500 million on the Family Assistance Plan. All together, expenditures for the year will reach $250 billion, which will generate a deficit of at least $15 billion in the unified budget. And that will be on top of a deficit of some $28 billion in this fiscal year and $23.2 billion last year.

Many experts believe that deficits have been pushed perilously close to their manageable limit, and that if they continue, chronic inflation is certain to flare up. Says Alan Greenspan, a member of TIME'S Board of Economists: "The budget has begun to get substantially out of control."

The budget is severely squeezed because income taxes have been cut six times since the Korean War, for a cumulative revenue loss of $40 billion a year. This year's investment and depreciation tax breaks for business and reductions in personal income taxes will give a nice push to the economy; they will also diminish tax receipts by $6.9 billion in the fiscal year that starts in July.

Even before the latest tax cuts, a Brookings Institution study by former Budget Director Charles Schultze revealed that no money would be available for new national needs until 1975 at the earliest. Schultze reckoned that between 1972 and 1976 expenditures for existing programs alone would go up by $55 billion. Starts on proposed new projects, including family assistance and revenue sharing, would add another $11 billion. By 1976, Schultze now figures, less than 1% of the G.N.P. --about $10 billion--would be on tap for new projects. Much of this money could be swallowed up by a national health insurance plan. This leaves the Government scratching for funds to pay for myriad other programs to improve the nation's quality of life.

Where will most of the money come from? Probably from the pockets of middle-income citizens. Says Joseph Pechman, a member of TIME'S Board of Economists: "The very rich and the very poor now have the biggest tax burden. If we are going to have needed public programs, we're going to have to raise taxes on everybody above the poverty line." Laurence S. Ritter, a New York University finance professor, estimates that to underwrite the costs of improving U.S. society, the average tax bite would have to be increased $300 per family by 1975.

Incendiary Issue. Seeking to break out of the fiscal straitjacket, Nixon is seriously studying a "value-added tax," which he may propose to Congress as early as March. A kind of national sales tax, the VAT would collect a percentage of the cost that is added to a product as it moves from raw-material supplier to manufacturer to wholesaler to retailer. For example, when a furniture maker sold a carload of chairs, he would pay to the Federal Government perhaps 3% of the difference between the raw-material cost and the selling price of the product. This would be above and beyond his regular sales and income taxes. Then the wholesaler of the chairs would also pay a 3% VAT on the amount that he added to the selling price; the distributor and the retailer, too, would pay value-added taxes. These extra costs would ultimately be passed on to the consumer as increased prices.

Most of the VAT receipts, which it is estimated would reach between $10 billion and $12 billion a year, would go to municipalities to pare education costs. This would ease the burden on homeowners, who pay for schools out of their increasingly heavy property taxes. Because the money would be distributed on a per-pupil basis instead of by school district, the plan would enable Nixon to redeem his pledge to aid parochial schools.

The VAT has some drawbacks. A study by Otto Eckstein's Data Resources Inc. notes that it would slow the economic recovery by slightly increasing prices. This would crimp sales and production and thus retard a return to full employment. The study estimates that with the VAT the jobless rate at the end of 1973 would be an estimated 5%, v. 4.8% without it. The VAT will meet determined opposition in Congress. Democrats and labor chiefs see it as another regressive levy that adds unfairly to the burden of the poor and the lower middle class. But whatever happens to the VAT, the budget squeeze--and what to do about it--is certain to be an incendiary issue in the presidential campaign.

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