Fight over a Big Raise

FOR the next several years, Washington's economic managers face a dismal three-way choice: raise taxes severely, slash federal spending brutally, or countenance rapid inflation. That is the hard conclusion of a major new study of federal finance by the Brookings Institution, the nation's most prestigious private economic think tank. Release of the study last week immediately sharpened a basic campaign debate over the issues of how much social service Americans should expect from the Federal Government and how heavily they should be taxed to pay the bills.

At present tax rates, concluded a team of Brookings economists headed by former Budget Bureau Director Charles Schultze, the future spending increases built into current federal programs and those the Administration proposes now will lead to a budget deficit of $17 billion by fiscal 1975. That will occur even if the economy is by then operating at full employment, which is usually defined as a jobless rate no higher than 4%. Large deficits can be tolerated when there is substantial slack in the economy, but so huge a red-ink figure at full employment would be grossly inflationary. Not until fiscal 1977, the Brookings scholars believe, will economic growth bring in enough tax revenue to yield a budget surplus of a relatively small $5 billion. Even that calculation assumes that the Government will start not a single new major spending program for the next four years. All by itself, however, the proposed 20% increase in Social Security benefits now being talked up in Congress could more than wipe out any potential surplus.

Though the report was prepared by mostly Democratic economists, the Nixon Administration voiced no disagreement with their mathematics. But it strongly disputed their policy conclusions. White House policymakers seized on the chance to make clear their choice among the available options. At a press conference called to rebut the Brookings study, Presidential Assistant John Ehrlichman painted this picture of Nixon's policy during a potential second term: taxes will be held down, federal social spending will be slashed deeply, and the financial burden of many programs will in effect be shifted to states and cities.

President Nixon, Ehrlichman said, will "oppose any increases in federal taxation for the foreseeable future." But, he added, "we reject as a declaration of bankruptcy" any idea that the Government cannot cut spending enough to balance the budget at full employment.* The Administration has prepared a list of 110 social programs enacted under Lyndon Johnson's Great Society that Ehrlichman called "fit for repeal." He named only one: the $450 million-a-year Model Cities program of building showcase neighborhoods in blighted urban areas. Brookings estimated that the Great Society programs have increased federal spending by $34 billion a year. If such programs are to be continued, Ehrlichman implied, they will have to be financed by states and cities with money from Nixon's proposed revenue-sharing plan.

The contrast with the campaign position being shaped by leading Democrats could hardly be sharper. The Democrats are advocating expansive new federal programs to help the poor and fill other rising public demands for improvements in health and schooling. Front Runner George McGovern, for instance, proposes a comprehensive plan of national health insurance, and Edward Kennedy has introduced a bill to start one. The Brookings economists calculate that the Kennedy bill would cost a gargantuan $60 billion a year. Setting up a national system of day-care centers for the children of working mothers might cost as much as $12 billion annually. The study argues persuasively that programs of this magnitude could be financed only by a big boost in taxes.

Democratic campaigners have been fudging the tax-increase issue by talking mostly about tax reforms designed to soak the affluent and sock corporations for more. The Brookings report makes clear that there is not nearly enough money in that limited, socially divisive approach to pay for any fancy new spending schemes. As an illustration, Schultze's team calculated the potential yield from a package of several Democratic-advocated tax reforms, including reducing the oil-depletion allowance and increasing taxes on capital gains and dividends. The total came to $13.4 billion a year--not even sufficient to pay the expected increases in costs of current federal programs two years from now.

Voters' Choice. The alternative facing the nation's voters should be clear. If they want to hold taxes down, as Nixon pledges, they must forget about new social programs and even do without some of the current ones. If they want to enjoy the programs that the Democrats propose, Americans must accept a major increase in income or Social Security-type payroll taxes --or both--that will hit the middle class as well as the rich.

The idea common in the 1960s, that dynamic economic growth would pay the bills for increased social spending without tax increases, has been definitively exploded by the Brookings study. Generous federal tax cuts of the past decade and the rising cost of Government programs, including such Nixon Administration favorites as pollution control and federal aid to law enforcement, have clearly ended the days when rising national riches could be counted on to pay for rising public demands. That result is unfortunate, but there is a silver lining. At least this year the voters really do confront a choice, not an echo.

* Ironically, Ehrlichman made his profession of budget-paring zeal in a brand-new powder blue and obviously expensive auditorium in the Executive Office Building. When asked by a reporter how much it had cost, he confessed with annoyance that he did not know.

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