There's an unspoken consensus among analysts in Wall Street and observers in this political capital that your taxes are going up--eventually. Here's the way the experts read it:
The huge budget deficits, about $200 billion a year, are the main economic problem facing the nation.
But nothing much will be done to reduce the deficits for the next 18 months or so, or until after the 1984 election, and the inaugural of the next president.
The president in 1985, whether he is Ronald Reagan serving a second term, or a successful Democratic opponent, will have to face the problem as his first priority.
And the probable outcome is a meaningful reduction of the deficits, mostly as a result of higher taxes that at least in part will reverse the Reagan tax-cutting program of 1981-82-83. Why probable? Because the alternative, in terms of a wrecked economy, is too difficult to contemplate.
If this scenario proves to be roughly correct--a lot can happen in any 18-month period to change the outlook--the big political and economic debate of 1985 will revolve on the nature of the tax action.
Increases could come in higher personal taxes, a value-added tax, taxes on corporations, a new energy tax--or in some combination.
Politicians of both parties freely acknowledge that sustained $200 billion annual deficits will cause economic chaos by draining personal savings, and thereby boosting interest rates sufficiently to choke off economic growth--but they won't act now.
The Reagan administration, in a gutless action, has dropped the president's highly advertised "contingency" tax plan that theoretically would have introduced at least $50 billion in tax increases beginning in 1985 if the deficits continued at a high percentage of gross national product.
An equally gutless Congress succumbed to the banking lobby, and junked withholding provisions--which weren't even new taxes--on interest and dividend payments to individuals. That threw away about $15 billion in revenue over the next few years.
For the moment, the Reagan administration--which ideologically is opposed to raising taxes--is making believe that the "sparkling" recovery it says is under way will make the deficit problem more manageable. But Economic Council Chairman Martin Feldstein bluntly told the Senate Banking Committee that "it is sad but true that increases in the rate of growth reduce the deficits by amounts that are relatively small."
He estimated that a full 1 per-cent increase in GNP slices the deficit by less than $15 billion. Thus, we could have the wildest boom imaginable for the next several years, and still have deficits well over $100 billion a year--unless something is done at the same time to reduce spending and raise taxes.
The "structural" deficit--the part that won't go away because of steady escalation of defense and social spending, and the steady erosion of the tax base--is huge. Official figures show that the deficit, on a "current services" basis, would rise from $208 billion in fiscal 1984 to $300 billion in 1988, even if the economy comes out of the slump.
No one in Washington needs another 18 months to figure out a solution to this problem, but there simply aren't enough senators and congressmen who are prepared, prior to the 1984 election, to vote for tax increases or reduced spending for Medicare or other "entitlement" programs--when there is no leadership from the White House.
Sen. Jake Garn (R-Utah) said the other day that all in Congress "are born-again converts to fiscal conservatism," but their votes "do not match up with their rhetoric."
Yet, as Federal Reserve Board Chairman Paul A. Volcker told Congress last week, the accelerated pace of recovery "brings the day of reckoning in financial markets" closer. He cited "the urgency of further action to reduce the budgetary deficit to make room for the credit needed to support growth in the private economy. Left unattended, the situation remains the most important single hazard to the sustained and balanced recovery we want."
Economist Alan Greenspan suggested last week on "Meet the Press" that the financial market experts already have cranked into their computers the conclusion that nothing much will be done for a while to lower the deficits. That's why real long-term interest rates continue at record high levels. In the first half of 1983, long-term rates were 8 1/2 percentage points higher than the inflation rate (measured by the GNP deflator).
Greenspan's message, in effect, is that the Federal Reserve, and its money targets, really have very little to do with long-term interest rates. To be sure, the Fed's day-to-day operations--or more accurately, the markets' perceptions of those operations--can affect short-term interest rates to some degree.
But, says Greenspan, "It's the deficits, specifically the perceived deficits in the years 1985 and beyond, which essentially are currently driving long-term interest rates, and will do so for the next couple of years."
And that's why Volcker, in announcing slightly revised money supply targets for the rest of the year, told Congress that they would not, by themselves, affect interest rates. The Fed posture is cautious--nowhere near as severe as prominently advertised in advance--and clearly designed to sustain, rather than interfere with, the current recovery.
"The money growth targets, by themselves, do not necessarily imply either further interest-rate pressures or the reverse in the period ahead--much will depend on other factors," Volcker said. The main factor determining interest rates will be whether Congress reduces the federal budget deficit, he made clear.
In the tongue-in-cheek language of the international bureaucracy, the IMF's World Economic Outlook said that the prospect of large U.S. deficits "even after the economy emerges from the current recession does not augur well for an enduring expansion of economic activity."
Greenspan put it in sharper focus:
This "is a major issue confronting the nation. I don't think it will be resolved in the next 18 months--but it sure better be after that!"