Clinton Economic Program Takes Cue From Perot

Amid trial balloons and shouts of alarm, outlines of the Clinton economic program are becoming clear. It will be a program to make Ross Perot proud.

Clinton will gamble that cutting the deficit by about $185 billion between now and 1996 will drop long-term interest rates by a full percentage point or two and spur the economy more powerfully than public-works spending ever could.

That’s why incentives will be meager. Labor Secretary and Clinton friend Robert Reich suggested Tuesday that a stimulus package of tax credits and spending programs would total $15 billion to $20 billion. That’s peanuts--far less than the $37 billion a broad-based investment tax credit would pump into the economy.

But Clinton isn’t interested. In his economic program, which will be announced over the next month, tax increases will outweigh incentives.

Politically, Clinton is taking his cue from Perot, who fired the public imagination last year with tough talk about cutting the deficit.

“If you’re talking taxes, attack the really difficult ones, like Social Security cost-of-living allowances and Medicare,” Perot said last year when he was running for President. “I would go to a new tax system. I’d be buried with Congress, and in 60 days we’d have new tax systems to offer the American people.”

Clinton may bring in some humdingers in the taxing line. To raise money quickly, an energy tax is a good bet. “It’s like turning on the faucet--money comes in right away,” says a congressional tax expert.

The tax would be imposed on gasoline, coal and heating oil--thus affecting all sections of the country--and could be the equivalent of 10 cents to 15 cents per gallon of gas, says Joseph Tovey of Tovey & Co., a New York-based energy investment bank. Such a tax would bring the government $20 billion in additional revenue--offsetting the cost of the stimulus program but not much more.

For longer-term deficit reduction, a change in the tax system may be in the offing. A consumption tax, modeled on the value-added taxes (VAT) used in many countries, is being talked about favorably in Congress and the White House.

The tax, as explained in “Consumption Tax,” a book published by the American Council for Capital Formation, is levied at every stage of production and distribution. For example, a car manufacturer would pay a tax on raw sheet metal, process the metal into a car and then collect a tax from the dealer on the finished vehicle. The dealer would then collect a tax from the customer.

Or, a dentist would pay a tax when purchasing enamel and silver for caps and fillings, then charge patients a tax on top of the fee for dental services.

A VAT is very appealing to economists and politicians--for good reasons and bad. An advantage is that capital expenditure can be exempted, thus encouraging business investment. Also, savings are encouraged because most non-food purchases bear a tax.

*

The drawback is that value-added taxes put too much power in the hands of politicians. They can be changed easily and imposed selectively--lower on some products, higher on others. In Europe, for example, consumers pay much more than Americans for household appliances, partly because politicians have decided that clothes dryers are luxury items, not necessities.

The attraction to the Clinton Administration is that even a low rate of VAT would bring in considerable revenue--$60 billion in the first year. Still, don’t look for one in 1993; new tax ideas take time to get through Congress. But consumption taxes will get a good debating this year.

Yet taxation alone won’t cut deficits; spending cuts will also be needed.

“Nothing can really go forward unless we redefine Social Security and Medicare entitlements,” says economist David Resler of Nomura Securities in New York. One area to watch are cost-of-living adjustments in Social Security--cutting them could trim $11 billion a year from the federal deficit.

Limits and cutbacks in Medicare, to rein in the federal budget’s projected 10%-a-year growth in Medicare expenditures, are a certainty in Clinton’s health reform program, to be announced by April 20.

The payoff for fiscal discipline could be impressive. If Clinton makes progress toward cutting the deficit in half, long-term interest rates--as measured by 30-year Treasury bonds--could fall from today’s 7.23% to 5.75%, economists say. Such rates would make housing and business investment very attractive--and build a reelection bandwagon for 1996.

*

But there is risk. If loading taxes on a fragile economic recovery causes a renewed recession, Clinton could be sent packing back to Little Rock four years from now. Stock and bond markets may cheer the thought of deficit reduction today, but they’ll change their tune if taxes clobber consumer purchasing power.

Why take the risk? Because politically that’s the way the wind blows. “People want straight talk,” says a Washington staffer.

There is more credibility in talking about taxes and deficit reductions than there is in public works and promises. The country’s mood has shifted, as Perot demonstrated, and Clinton appears to have noticed.