Ways To Get Out from Under

Bringing down America's twin deficits will demand a wealth of ideas and compromises. No single fix will do the job. Nor are any of the remedies likely to be painless. But the Administration and Congress still have time to tailor a compromise on reducing the budget gap before the Nov. 20 deadline, when $23 billion in arbitrary cuts takes hold under the Gramm-Rudman law. Some reasonable proposals for boosting revenue, cutting spending and reducing the trade deficit:

Levy an energy tax. This could be a twofer: it would not only help ease the budget deficit but could also reduce the trade gap by discouraging demand for imported oil. A tax of $5 per bbl. on annual U.S. imports of some 1.5 billion bbl. of foreign crude would raise approximately $7.5 billion in extra revenues. An alternative is a gasoline tax of 5 cents per gal. in addition to the current 9 cents federal levy, which would produce an extra $5 billion or so (1986 U.S. consumption: 112 billion gal.). Though energy taxes tend to be regressive, citizens in low-income brackets could receive offsetting credits on their income tax returns.

Cut agricultural supports. Too much of the price-support budget goes to the wealthiest farmers. During 1985, when $23.7 billion was distributed, only one- third of U.S. farms collected price supports; almost 70% of those payments went to farmers with annual sales of $100,000 or more. Former Delaware Governor Pete du Pont, a Republican presidential contender, proposes to wean farmers from income subsidies over five years, thus producing a $5 billion savings the first year and $75 billion in total. Agrees Harvard Economist Robert Reich: "The benefit of such aid is not as great as the social costs in failing to cut it."

Trim defense spending. Since no one thinks that America's 2.1 million soldiers and sailors are overpaid, scrutiny should be focused on the 50% of the nearly $300 billion defense budget that goes for hardware, operations and maintenance. What deserves even more attention than the notorious price gouging by defense contractors on spare parts (one toilet seat: $750) is the wasteful proliferation of large-scale weapons systems. A raft of new, expensive hardware is coming out of research, ready to go into production. One package of eight strategic systems (total cost: at least $250 billion) includes the Stealth bomber and three missile systems: the submarine-launched D-5, the Midgetman and the Peacekeeper (formerly MX). Congress should seriously reconsider whether all these different weapons are necessary.

Tighten up interest deductions. America's most venerable tax shelter is the deduction on home-mortgage interest, a provision that was originally created to help families buy their first home. But perhaps that write-off is too generous. Earlier this month the House Ways and Means Committee adopted a $12.3 million tax-increase package that, among other measures, would finally put a cap on the deduction, limiting it to the first $1 million in mortgage debt. But why not lower the boom even further? As Committee Chairman Dan Rostenkowski pointed out, "With the people I represent, if you talk $75,000, you're talking big money for a home." A sensible limit might be $250,000.

Control entitlements. Federal entitlement payments that are dished out to citizens regardless of their financial need rose from $200 billion in 1979 to $400 billion in 1986, observes former Commerce Secretary Peter Peterson. Like many budget critics, Peterson advocates a so-called means test to make sure that such benefits as Social Security and Medicare go only to those who really need them. The number of senior citizens, for example, has grown significantly in recent years, but the group's poverty rate is edging downward (from 13.9% in 1978 to 12.4% last year). One type of means test would cut off benefits for recipients above a certain income level. "There's a big distinction between entitlements for poor people and entitlements for everybody," says Ruben Mettler, chairman of TRW. Another suggested method to get entitlement costs under control would be to reduce the cost-of-living adjustment from 100% of the consumer price index to, say, 60%.

Encourage consumers to save. If Americans increased their savings rate (only 4% of disposable income last year, vs. nearly 17% in Japan), they would spend less money on foreign imports and help cure the trade deficit. Moreover, an expansion of America's paltry savings pool would help reduce U.S. dependence on foreign financing. One proposal for bringing that about: a progressive consumption tax. This kind of levy would work like a national sales tax, but be progressive in the sense that it would exempt necessities (food, housing, medicine, clothing) to avoid putting an undue burden on low-income citizens. Former Arizona Governor Bruce Babbitt, a Democratic presidential contender, contends that a 5% consumption tax could raise $40 billion to $60 billion a year.