Monday, Aug. 20, 1984

Scoring Points with Candor

By KURT ANDERSEN

Mondaleputs Reagan on the defensive by promising new taxes

The $263 billion deficit projected for 1989 is so large, the candidate said, that a stack of $1 bills in that amount would reach halfway to the moon. The Federal Government, he went on, needs to borrow $500 million today just to get through tomorrow. The simple, vivid images were right out of Ronald Reagan's 1980 campaign repertoire, but now the speaker was Walter Mondale. All week long the Democrat pounded away at the budget deficits ("a trap door under our economy") and at the President's denial that tax increases are inevitable. And all week long the Reagan Administration was peevish and confused as it responded. Said one White House aide of Mondale's demarche on the deficit: "He really stuck it to us. It was brilliant. We look terrible."

It is remarkable that the Administration has been put on the defensive about an economic issue: by most measures the economy is in crackerjack shape. Even as Mondale was exploiting the deficit issue, Wall Street was trading and taking profits with pent-up gusto: 754.5 million shares were sold last week, a record. Both the Administration and the Congressional Budget Office issued somewhat cheerier economic estimates for 1984 and beyond. But the federal budget shortfalls continue to mar the Reagan record: the nonpartisan CBO predicted that without further budget cuts or tax increases, the deficits will continue to grow, almost doubling the cumulative federal debt (now $1.3 trillion) over the next five years.

Last week's campaign attacks and counterattacks come down to a question of how and when those monstrous deficits will be paid off. Neither candidate has risked specifying all the budget cuts he would propose. When it comes to raising revenues, Reagan is sticking to the supply-side idea that, as the economy grows, tax collections will increase enough to stanch much of the red ink. Mondale believes that the go-go economic expansion is being bought with excessive Government debt that will drive up interest rates and, sooner or later, taxes.

The current, high-pitched debate began last month, with Mondale's convention speech. Taxes must be raised, said the Democratic nominee, but only he, not Reagan, would admit that up front. Recalls a White House aide, "Everyone here was saying, 'This is just wonderful. Nobody wins an election promising to raise taxes.' " But when asked about his opponent's contention a few days later, Reagan left the door open to new taxes, giving credibility to Mondale's charge that the Administration has a secret plan to impose them. Last week the President was considerably less equivocal. "I will propose no increase in personal income taxes," he said in a radio talk recorded at his California ranch, "and I will veto any tax bill that would raise personal tax rates for working Americans." Reagan was careful to limit his vow to personal income taxes: some kind of federal sales tax is favored by many of his advisers. He also claimed that Mondale's budget proposals would entail an average of "$1,500 more per household" in tax hikes.

Mondale struck back quickly. "I'm convinced they are going to sock it to the average American; they've got in mind a national sales tax or value-added tax." Reagan, he charged, "seems to be afraid to be straight with the American people." Mondale, for his part, has not yet specified how he would make good on his promise to reduce the deficit by two-thirds during his first term. Rather than seeking any sort of sales tax, which hits poorer people relatively harder than the well-to-do, he would probably rely partly on higher income tax rates. How much higher? Reagan's estimate of $1,500, Mondale said, "is haywire and completely off. He has some hocus-pocus numbers there." In fact, until Mondale explains exactly where he would cut programs and raise taxes, the average family's prospective share is uncertain. However, a $1,500-per-household increase would by itself slash the 1984 deficit by $125 billion, or two-thirds.

Vice President George Bush also was drawn into the delicate to and fro of tax-policy clarifications. Bush, reasonably enough, told reporters that the President "will consider revenue increases." But even that was apparently overstating the President's flexibility. "Walter Mondale is not telling the truth," declared Reagan before a luncheon meeting with Bush. "We have no plans for, nor will I allow any plans for a tax increase. Period." The President thus painted himself into a tighter corner, although his careful disavowal of any "plans" could provide him an out if he raises taxes after all. At a press conference later in the day, however, Bush did not play along. Concerning tax increases, he said, "Any President would keep options open." Including Reagan? "Sure, I'd say so."

Mondale capitalized on the Republicans' disarray. "I believe Ronald Reagan and George Bush should have a national debate on television," he joked. Reagan's policy, he said, recycling Candidate Bush's swipe at Reagan in the 1980 primaries, amounts to "voodoo economics."

By midweek the President's team was wary of talking about taxes. Between the fiscal ideas of President and Vice President, claimed Bush to reporters as he stepped into a limousine, "there are no differences." Then he said, "No more nitpicking! It's an upbeat day, it's off to the races." Treasury Secretary Donald Regan, during testimony before the Joint Economic Committee of Congress, repeated the presidential line almost word for word. "There are no plans for tax increases in 1985," he said. Yet he declined to venture an opinion about 1986 or beyond: "That's the trouble George Bush got in the other day." Nonetheless, in a television interview a day later, Regan tossed away caution. Said he: "We have no plans now for increases in 1986,1987,1988. Would you like to try for 2000?" Regan predicted that the gross national product will grow at a rate of 7.2% this year, while unemployment will drop to 6.8% and inflation will be at just 4.4%.

The CBO, however, has a more pessimistic view of the deficits for the later 1980s, the so-called out-years. While Regan predicts that economic expansion and much lower interest rates will help shrink the 1989 deficit to less than $170 billion, the CBO reckons the 1989 shortfall at $263 billion. Even one Reagan adviser conceded that the Administration's long-term projections are overly optimistic. "The out-year numbers are soft," he said,"in the sense that they tend to be low-balled." Mondale suggested the estimates are outright lies, or"Pinocchio projections." When the White House issues its official deficit forecast this week, he joshed, "I think you're going to see the longest nose you ever saw in your life."

In addition to jabbing at the deficit, Mondale blamed the Reagan Administration for high interest rates, the strong dollar, and thus the decline in American exports. But can he get serious political mileage out of rather arcane economic issues--let alone out of a promise to raise taxes? "Walter Mondale believes the people are smarter than the Administration thinks," says Aide Richard Leone. "They know the deficit is a major problem, that it has to be dealt with through hard decisions, not wishing. It also plays as a major fairness issue: do we want to continue to cut taxes for the rich and cut social spending for the poor?" So far the issue has made Mondale seem gutsier. Says Democratic Congressman Richard Gephardt of Missouri: "There is something very politically attractive about being honest with the American people."

Yet today's bracing candor could be tomorrow's tiresome nagging. There seems sure to be a backlash if Mondale spends the next three months talking mainly about tax increases. Moreover, he will have to become painfully specific about how he proposes to cut $150 billion from the 1989 deficit. By what amount will he raise income taxes and for whom? Heavier taxes on the affluent, which he has already proposed, cannot do the trick alone; the middle class will have to pay a share too. Precisely where does he plan, as he says, to "squeeze the budget"? Social Security? Medicare? Mondale has to preach sacrifice, a sermon difficult to deliver from any political pulpit.

While it will be tough for Mondale to discredit a President presiding over a slam-bang economy, he showed last week that he can change the subject nimbly, and score points for frankness. "Let the Republicans ask the voters if they are better off than they were four years ago," says Mondale Campaign Chairman James Johnson. "That is not a forward-looking message. People know the future doesn't take care of itself." Or so Walter Mondale will try to persuade them.

--By Kurt Andersen. Reported by Gisela Bolte/Washington and John E. Yang, with Mondale

With reporting by Gisela Bolte, John E. Yang