Cut and Tax

By Charles P. Alexander

A recipe to close the deficit

Trying to close the federal budget deficit of nearly $200 billion is a bit like making the perfect spaghetti sauce. There are hundreds of different recipes because individual cooks have their own special tastes. Congressional Democrats want to trim the deficit primarily by reducing military spending and raising taxes, while the White House and many Republicans would prefer to cut social programs.

Now the Brookings Institution, a respected Washington research organization, has put forward a bold budget-cutting recipe that will be tasty to no one but may show the way toward a compromise. Published last week, Economic Choices 1984 (Brookings; $8.95) presents a strategy that combines cuts in military and domestic spending with tax hikes. The 171-page book is the work of a team of ten economists headed by Alice Rivlin, former director of the Congressional Budget Office.

Unless Congress takes action, the budget deficit is expected to rise inexorably from $197 billion next year to $308 billion by 1989. The Brookings proposal would pare the deficit to $145 billion next year and push it down to only $20 billion by the end of the decade. Carefully balanced, the plan calls for spending reductions of $92 billion, equally divided between defense and domestic cuts, and tax increases of $108 billion in 1989. Lower interest costs on the national debt would save another $88 billion that year.

The Brookings economists offer detailed suggestions for meeting those goals. On the domestic spending side, the book advocates a one-year freeze on all social programs except those intended to help the poor. Beyond that, the proposal calls for long-term spending restraints concentrated in four major areas: Social Security, Medicare, federal pensions and farm benefits. The economists suggest, for example, that the initial level of Social Security benefits that people receive when they retire could be reduced by 5%. In addition, the book asserts that the rate of growth in payments that hospitals receive for each Medicare patient should be slashed by more than two-thirds, after adjustment for inflation. For all domestic programs, the target would be savings of $46 billion by 1989.

The book argues that many of the proposed weapons systems in the Reagan military buildup are redundant. The Pentagon does not need the land-based MX missile, say the Brookings experts, when it also plans to have the submarine-based Trident D-5 aimed at Soviet targets. Also high on the hit list are the B-1B bomber, the AH-64 attack helicopter and the F-15 fighter. By Brookings estimates, the Government could carve $46 billion out of the defense budget by 1989 without threatening national security at all.

Even with big spending cuts, however, revenue increases will be needed. The Brookings economists think Congress should aim to boost taxes by $23 billion in 1985. Much of that could come from eliminating many income tax deductions and closing loopholes. Congress could, for example, raise $3.9 billion by taxing employees on employer contributions to health plans and $600 million by reducing business entertainment deductions by 50%. The Brookings book lists 23 such-steps that could bring in $30 billion, but suggests that a politically realistic target might be $15 billion. The additional $8 billion needed to meet the $23 billion revenue goal could be raised by imposing a temporary 2% income tax surcharge.

Over the long run, the Brookings economists believe, the tax system needs a complete overhaul. Under their plan, most traditional deductions would be disallowed, but taxpayers would be able to subtract from their incomes any money that they had set aside during the year in savings accounts, stocks or other investments. This provision would strengthen the economy by increasing savings and stimulating investment in new plants and equipment. By doing away with deductions, the Government could boost revenues while lowering tax rates. According to Brookings projections, Congress could increase receipts by $108 billion in 1989 and still drop the maximum tax rate from 50% to 38%.

The Brookings economists admit that budget balancing will be difficult and painful, but they argue that the only alternative is a burgeoning deficit that "endangers the future growth of the U.S. economy and undermines the ability of American industry to compete in world markets." Says Rivlin: "The best time to deal with the deficit is now. Every day we delay, we have a bigger problem to handle."

-- By Charles P. Alexander.

Reported by Christopher Redman/Washington

With reporting by Christopher Redman