$25-Billion Tax Hike Urged to Cut Deficit : Budget: Rep. Hamilton calls also for an equal amount of spending cuts. Individual income levies would not be increased.

The chairman of Congress’ Joint Economic Committee called Thursday for a “package deal” that would include a tax increase of as much as $25 billion a year and equally large spending cuts to break a deadlock between President Bush and Democrats on Capitol Hill over how to reduce the deficit, which ran at $152 billion in the fiscal year that ended Sept. 30.

The suggested compromise would not require raising individual income tax rates, said Rep. Lee H. Hamilton (D-Ind.), who made his proposal in the chairman’s annual report. He did not specify what taxes should be raised, saying that there is a “long list” of possibilities that could be considered by Congress and the Administration.

But he said that a package totaling $40 billion to $50 billion--equally divided between spending cuts and tax increases--would put the government “on a glide path toward a balanced budget.” He added: “It’s doable.”

Hamilton said also that he strongly opposes a Bush-backed reduction in capital gains taxes as “unfair, costly and ineffective.” His opposition reflects the views of the Democratic leadership on an issue sure to be revived in 1990.

“At present, the deficit is like a hot potato passed back and forth between the Administration and the Congress, as each seeks political advantage, or at least the avoidance of political pain,” Hamilton said in his summary. “If this game continues, we will all get burned,” he warned.

The President, whose antagonism to new taxes is well known, has shown no inclination to accept similar advice from Democrats in the past. Both House Speaker Thomas S. Foley (D-Wash.) and Senate Majority Leader George J. Mitchell (D-Me.) have said that no tax increase could pass Congress without active White House leadership.

Bush’s own budget is to be announced on Jan. 22. Although Hamilton’s recommendations are not binding on Congress, they are likely to help frame the coming economic policy debate.

Hamilton called Bush’s “no new taxes” stance unrealistic.

“We cannot eliminate the deficit without a tax increase,” Hamilton said. “Given the legal obligation of servicing the national debt, plus the programs that are accepted by the broad consensus of the American people, spending cuts alone will not suffice.

“A tax increase alone is not acceptable politically,” he added. “Therefore, a balanced budget can be achieved only through a package political deal that includes spending cuts and a moderate tax increase.”

Of the estimated deficit of $152 billion for the last fiscal year, he said:

“No one wants a deficit this high. Yet, just keeping the deficit from growing has involved great pain . . . . Eliminating the deficit will be far more painful and will require far more hard choices.”

His report said that 86% of the current budget is earmarked for categories of spending that it would be unwise, difficult or, in the case of entitlement programs like Social Security, impossible to cut.

Because the deficit accounts for 12% of the budget, it clearly cannot be eliminated by reductions in the remaining 14% of programs that can be cut, he concluded.

But Hamilton made it clear that he believes deficit reduction is essential to preserving America’s high standards of living and to fix problems of economic growth and international competition.

After noting that rosy economic forecasts and accounting gimmickry have obscured the size of the deficit and allowed public officials to duck responsibility for taking effective steps to reduce it, Hamilton proposed a new five-member commission to decide whether the Administration’s assumptions or Congress’ numbers are correct.

Under his plan, the commission would decide each year whether to accept either the economic assumptions put forward by the Office of Management and Budget or those presented by the Congressional Budget Office. Hamilton said that this would tend to minimize the “smoke and mirrors” and rosy scenarios employed in the past to mask the size of the deficit.

In alluding to the big tax cuts enacted in 1981 at the start of the Ronald Reagan Administration, Hamilton said: “Upper-income Americans were the main beneficiaries of tax cuts in the early 1980s. There is no evidence . . . that those benefits have trickled down to lower-income Americans.”

Hamilton’s study said that the gap between the richest and the worst-off Americans in 1988 was the largest on record since 1947. About 32 million people--or 13.1% of the population--have incomes below the nation’s poverty line. At the same time, those in the top 20% have an average family income of $84,938, he said.

The figures showed that the overall average family income last year was $32,238. The standard of living of 60% of all Americans, Hamilton added, has “stagnated” over the last decade.

Although he recognized that both the inflation rate and unemployment rate are now close to the relatively desirable 5% range, Hamilton forecast “weak” growth of no more than 2.5% a year in the near future, and even slower expansion later on.

“Our economy has been driven for most of this decade not by investment but rather by a binge of consumption that threatens our long-run standard of living and our standing as the world’s leading economic power,” he asserted.

CHANGES IN FAMILY INCOME

Income as measured in 1988 dollars

Average family income Percentage 1979 1988 change Lowest 20% of population $9,278 $8,880 -4.3 Second-lowest 20% 20,697 20,655 -0.2 Middle 20% 31,223 32,238 +3.2 Second-highest 20% 43,001 46,330 +7.7 Highest 20% 74,403 84,938 +14.2

Distribution of income between rich and poor

The Richest 40 Percent:

1979: 65.8%

1988: 68.0%

The Poorest 40 Percent:

1979: 15.3%

1988: 16.8%

Source: Report by Chairman of the Joint Economic Committee of the Congress, Dec. 28, 1989.