Taxing & Spending : Between a Political Rock and an Economic Hard Place

George Bush moved his lips last week and set off a political earthquake.

The President told congres sional leaders he wanted to hold deficit-reduction talks. He said no subject was off limits: “Everything’s on the table.” Everything? Even taxes?

What followed was a week of clarifications, elaborations, explications and disputations worthy of a medieval seminary.

The President’s spokesman, White House Press Secretary Marlin Fitzwater, explained that what the President wanted was “an open debate that is unfettered with conclusions about positions taken in the past.” Positions taken in the past? Could that mean--campaign promises? Like, for instance, Bush’s famous pledge, “Read my lips: No new taxes”?

Not at all, Republicans argued. What the President meant when he made that pledge was no new income taxes. “That’s what people generally think of when they think of taxes,” Sen. Alan K. Simpson, the GOP whip, said helpfully. Budget director Richard G. Darman added, “to the extent new revenues are to be generated,” they would come from “user fees, rather than increases in income taxes.”

Why the sudden need for new “revenues”? “It’s not that the economy is weakening,” Darman said in a television interview. “It’s that the economy is not as strong as it should be.” Oh, OK.

White House Chief of Staff John H. Sununu described how the budget negotiations would work. “If the Democrats want to come to the table and put (tax increases) there, it is their prerogative to put them on the table, and it’s our prerogative to say no. And I emphasize the no .” The White House promptly disavowed the remark.

“We’re not getting a clear message here,” House Budget Committee Chairman Leon E. Panetta (D-Carmel Valley) complained. So the White House made another effort to explain. “In the past, some people have said that raising taxes has to be on the table,” Fitzwater said. “But ‘no preconditions’ means just the opposite. It means the table is clean.”

Aha! When the President said, “Everything’s on the table,” what he really meant was, “Nothing’s on the table.”

Bush got elected in 1988 by promising two things: He would not raise taxes, and he would keep the recovery going. In the view of Bush and his advisers, the best way to keep the recovery going was not to raise taxes.

The President finds himself in difficulty because the two goals now seem to be incompatible. Unless something is done about the deficit, many economists fear, the record 7 1/2-year peacetime recovery may grind to a halt.

If Bush agrees to a tax increase, he and his party will face a political firestorm. If he does not agree to a tax increase, the deficit could get out of control and interest rates could soar. In which case the economy might slide into a recession. And Bush and his party would face a political firestorm.

In other words, the President seems to be between a political rock and an economic hard place. There is one difference, however. The political rock is real. If the Administration supported a tax increase, there would be hell to pay. Low taxes are what holds the GOP coalition together. You don’t think all those suburban voters support Bush because of his position on abortion, do you?

The economic hard place is hypothetical. It is not at all certain that the economy is about to tip over into a recession. The economic signals are mixed. Some parts of the country--New England, for example--are already in a recession. Other areas, like the West Coast, are booming. And if there is a danger of a recession, a tax increase may be the fastest way to get there.

The fact is, we’ve had high deficits and high interest rates for 7 1/2 years. And for 7 1/2 years, economic analysts have been warning that if we don’t do something about the deficit, the economy will crash. But it hasn’t. So why the sudden panic?

Because of something called “sequestration.” The Gramm-Rudman-Hollings law sets a deficit target of $64 billion for fiscal year 1991. If that target is not met, across-the-board cuts (“sequesters”) will go into effect for both domestic and defense spending, excluding Social Security and some programs for the poor.

At the beginning of the year, the Administration estimated that the 1991 budget deficit would be $100.5 billion. They therefore submitted a budget to Congress that cut the deficit by the required $36.5 billion, with no major tax increases. Congress did not much like Bush’s budget, but the Administration adopted a “take-it-or-leave-it” attitude. They figured that if the automatic cuts went into effect, the domestic cuts would be painful for the Democrats, and the military cuts would not be much worse than the Democrats were proposing.

Enter Darman with the bad news: The 1991 deficit may be as high as $165 billion. So the automatic cuts may turn out to be closer to $100 billion.

Cuts of that magnitude--almost 20% of most domestic and defense programs--would throw the economy into a recession. And Congress would get most of the blame. After all, Congress passed the Gramm-Rudman-Hollings law in 1985.

Notice that we are not talking about economics here. We are talking about politics. The Gramm-Rudman-Hollings law creates the threat of a crisis to force the President and Congress to do something about the deficit.

The conventional wisdom about the deficit is that it is like a recession stretched across 100 years. It eats away at the nation’s savings and investment, reduces productivity and stifles economic growth. But the one thing the deficit does not do is create a crisis. That is why it is so hard to deal with politically.

The American system of government works well in a crisis. Without a crisis, however, it is hard to get anything done. That’s the way the system was designed. For the federal government to act, there has to be an overriding sense of public purpose--as there was in 1933, when Franklin D. Roosevelt took office, and in 1981, when Ronald Reagan took office.

The Gramm-Rudman-Hollings law manufactures a crisis. It says that unless the President and Congress make progress toward eliminating the deficit, they will have to pay a heavy political price. The law has worked since 1985, and it is working now, even to the extent of forcing the Administration to reconsider its pledge of no new taxes.

The problem is that the public is not aware of any sequestration crisis. The public’s biggest concern is that taxes may go up. According to the Commerce Department, Americans are now paying 22.3% of their total income in taxes--the same as in 1980, before Reagan took office. While federal income taxes have gone down, Social Security taxes, property taxes, sales taxes and state income taxes made up the difference. As Senate Finance Committee chairman Lloyd Bentsen (D-Tex.) put it, “The Republican pledge of no new taxes is pure Bushlips.”

There is plenty of evidence that the tax revolt is alive and well. Three New England governors decided not to seek reelection this year because of unpopular taxes. On May 1, Texas Gov. Bill Clements vetoed a bill that would have reformed the school finance system because it entailed a half-cent increase in the state sales tax. As a result, the schools may end up under court control. According to a recent poll, 70% of Texas voters support the governor’s veto.

Washington politicos are watching what happens in California next month. On June 5, California voters will say whether they are willing to raise the state gasoline tax to improve their transportation system. Proposition 111 has everything going for it: an urgent and obvious need, revenues earmarked for a specific purpose and a political Establishment united behind it. If the measure fails, it will be a signal to the whole country that taxes are still political poison.

Suppose the California measure passes. Does that mean it is safe for Congress and the President to talk about new taxes? Not necessarily. Polls show that voters are willing to raise taxes for a wide variety of worthwhile social purposes, like better health care and environmental protection. But the public does not support higher taxes to reduce the deficit. That’s just paying for big government.

Moreover, the voters will pay higher taxes only if they know what the money will be used for and if they can see the result. Can Congress demonstrate that higher taxes will be used to bring down interest rates? Or that new taxes will prevent a recession?

Proposition 111 raises taxes in order to resolve a crisis that already exists. The purpose of new federal taxes would be to avert a crisis that has not happened yet. Moreover, it would be a crisis of the government’s own devising. Politically, that’s a tough sell.

Democrats have three things to fear in the budget negotiations scheduled to begin Tuesday. One is they will propose a tax increase and the GOP will beat them over the head with it.

The second is they will give up too much to avoid a tax increase. To make significant reductions in the deficit without new taxes, Democrats will have to talk about such politically sensitive subjects as Social Security benefits, Medicare and farm subsidies.

The Democrats may refuse to make a deal unless the President gets serious about taxes. But that, too, entails a risk. What his party has not figured out, one Democrat said, is, “What we do if the negotiations reach an impasse and the President, with all his credibility, walks into the press room and says, ‘I did my best, but the Democrats just wouldn’t talk about anything but taxes.” ’

Bentsen has it all figured out. “I think what (Bush) wants is a grand compromise where the Democrats do the taxing.”

How did President Reagan handle these terrible choices? Reagan was different from Bush. Bush listens to economists who tell him, “If you don’t do something about the deficit right away, Mr. President, there’s going to be an economic catastrophe.” Reagan would go out and find an economist who would tell him, “Don’t worry, Mr. President. There isn’t going to be any catastrophe.”

And there wasn’t.