Biting the Bullet on Deficits

By Ed Magnuson

President Reagan's economic President Reagan's economic policy keeps on churning out contradictory superlatives. Last year Reagan rammed through Congress the largest tax cut in U.S. history: $749 billion over five years. Last week bleary-eyed Senators, under the President's prodding, debated until 4:47 Friday morning before approving the biggest peacetime revenue-raising bill: $98.6 billion over three years. The measure, which seems at odds with the President's celebrated supply-side tax theory, passed by a mere three votes (50 to 47). No Democrat voted for it.

The package of tax hikes and loophole closings is needed to lessen the impact of what is already certain to become another record for the Administration: the nation's largest budget deficit. Reagan's own 1983 budget would have produced a deficit estimated by the Congressional Budget Office at $121 billion. When even leaders of his party rebelled at all that red ink, he supported spending cuts and tax increases that still are expected to leave a deficit of at least $105 billion. Democrats are refusing to support any tax increase at all in an election year. Some had hoped to repeal the final the President's three-year program to reduce individual income taxes by 25%. But Reagan has stubbornly refused to forgo that slash and apparently has the support to keep it intact.

While Democratic Senators voted en masse against the Republican tax package, some of them nonetheless supplied the votes to retain its key element, the withholding by the IRS of 10% of all interest and dividends earned by individuals who have savings accounts or own stocks. This withholding would be applied against taxes owed during the year. Pushed hard by Republicans Robert Dole, chairman of the Senate Finance Committee, and Majority Leader Howard Baker as a way to rebut critics who claim that Reagan's tax and spending cuts unfairly hurt the poor, the proposal was strongly opposed by banks and brokerage firms. They complained, quite validly, that it would cost them heavily in additional paperwork.

Supporters of withholding won with the argument that tax cheating on interest and dividend income was depriving the Government of some $8 billion a year; the Senate bill would recapture $4.3 billion of that. Still, a drive to delete the withholding provision, led by Republican Robert Kasten of Wisconsin and Democrat Ernest Rollings of South Carolina, lost by only three votes. The withholding proposal would have lost if such liberal Democrats as Edward Kennedy of Massachusetts, Alan Cranston of California and Christopher Dodd of Connecticut had not voted against the deletion amendment.

The tax package, which would raise $21 billion in its first year, was fashioned largely by Dole. Its biggest surprise was an attack on the "three-martini lunch," long decried by liberals as a subsidy for the rich. Over the objections of the hotel and restaurant lobby, the Senate voted to reduce by half the deduction allowed corporations for business-related meals and entertainment in town; a traveling businessman or woman would still be able to 5 deduct these expenses in full. This tax increase was added when a proposal to withhold a part of restausrant tips was defeated.

Also included in the package are a doubling, to 16-c-, of the excise tax on cigarettes; a tripling, to 3% by 1984, of the excise tax on telephone service; and a hike in the tax on airline tickets from 5% to 8%. Loopholes allowing wealthy people to escape heavy taxes through various shelters would be tightened, and medical deductions could be claimed only if they exceed 7% of gross income, rather than the current 3%. The oil, coal, gas, defense and aerospace industries, among others, would be affected by the closing of other loopholes. All told, business could lose more than a third of the benefits granted by Congress last year, including a controversial arrangement under which companies could, in effect, lease their tax credits to other firms.

The tax program faces tough sledding in the House, where the controlling Democrats are in disarray. Dole points out that "Democrats have been proposing tax reform for years, and there's a lot of tax reform in this bill." He has, in fact, been working with an old friend, House Ways and Means Committee Chairman Dan Rostenkowski, to let the Senate take the lead on the tax bill despite a constitutional requirement that the House must originate all revenue-raising legislation. Democrat Rostenkowski had hoped to go along with the Dole package, taking it to the House floor virtually intact so that the Republicans would have to bear responsibility for an election-year tax hike.

But last week Rostenkowski discovered that getting a vote may not be easy. The Republicans prefer to vote on a broad package, rather than line by line. House Speaker Tip O'Neill, on the other hand, wants to force House Republicans to vote on every item in the Senate package, to reinforce the impression that it is their tax bill. But there were real political dangers for O'Neill. If Republican conservatives in the House balk at some of their own party's tax hikes, as seems likely, the lack of Democratic support could kill the bill. That might allow Reagan, once again, to blame House Democrats for blocking his program and fueling budget deficits.

As the tax fight heated up, there were conflicting signals on the economy. Making his semiannual appearance before House and Senate committees, Federal Reserve Board Chairman Paul Volcker was berated by Democrats for not bringing down interest rates. He was able to point to the Fed's decision to drop the prime interest rate by half a point as a sign of what could continue if inflation decreases further. But he refused to promise any loosening of the money supply unless it does. At week's end, consumer prices, which seemed under control earlier in the year, were reported to have risen at an annual rate of 13.3% in June, the second straight month of double-digit inflation.

The Commerce Department saw a glimmer of light in its announcement that the gross national product may show a rise of 1.7% for the quarter that ended on June 30, the first such upturn since the third quarter of 1981. Murray Weidenbaum, the President's chief economic adviser, cited that as evidence that "the recession has bottomed out." Then, as though he considered his work complete, he abruptly resigned (see ECONOMY & BUSINESS).

Less encouraging were other major economic statistics released last week. Personal income increased only fractionally in June, and consumer spending actually declined from a year ago. Housing starts and durable-goods orders were both off sharply.

On a political trip to St. Louis, President Reagan was cautious about predicting an imminent economic recovery, perhaps because his earlier rosy projections had failed to materialize. "The signs are kind of mixed," he admitted. But he did not hesitate at all to continue his campaign for a constitutional amendment that would require the Federal Government to operate on a balanced budget. Reagan brazenly staged a political rally on the Capitol steps earlier in the week to promote this tantalizingly simple solution to what is an immensely complicated problem. As some 5,000 partisans interrupted him 26 times with applause, the President declared it was time for the Government he heads to learn that "its job is to wipe out deficits and not let deficits wipe us out."

Despite the President's plumping, the amendment encountered more resistance on Capitol Hill than was expected. The Senate, which had planned to put it to a vote, pushed back any action for at least a week. After a rush of enthusiasm, second thoughts were spreading in the House. Many lawmakers feared that the amendment would debase the Constitution and seriously reduce the Government's ability to respond to emergencies.

To Democrats opposing the balanced-budget amendment, Reagan's support for the idea was a political charade, since he is presiding over deficits greater than those of any of his predecessors. But the Democrats were also politically motivated in refusing to support a tax bill that was both urgently needed and remarkable for the way it addressed their own complaints about policies that favor the rich. Unfortunately, the contending forces in the great budget battles of 1982 were still playing political games with the nation's economic welfare. --By Ed Magnuson.

Reported by Neil MacNeil/Washington

With reporting by Neil MacNeil

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