Taxes, President Reagan said a week before the election, will be raised "over my dead body." But with the president reportedly in excellent health -- he's been chopping wood for relaxation at his California ranch -- the nation is nonetheless heading for a tax increase. The only question is who will be taxed, and whether the boost will be big enough and in time to head off a long-term sickness in the American economy.
Of course, Reagan doesn't like tax increases, and Republican as well as Democratic congressmen are not anxious to be tagged as the politicians who put a new bite on their constituents' pocketbooks, especially after all of the phony but politically potent rhetoric of the campaign. The GOP members ran under the Reagan no-tax increase banner, and the Democrats were flayed as being the party of high tax-masters.
And the weakening economy raises further doubts. The enormous drop in the real GNP growth rate from 7.1 percent in the second quarter to 1.9 percent in the third quarter, accompanied by lower interest rates, will no doubt dilute some of the sense of urgency about dealing with the deficit.
Clearly, the budget problem should have been addressed early this year as the economy was peaking -- or even before. "It was a missed opportunity," sighed Brookings research director Alice Rivlin in an interview just after the new third-quarter GNP number was published.
But the die is cast; one can almost feel it in the Washington air. For starters, enormous attention is being paid to two carefully plotted tax "reform" schemes that would abolish or reduce some of the most costly deductions or loopholes so as to create a larger revenue base, and then lower the top tax rates collected by the government.
These "flat" or "flattened" tax schemes -- one from the Democratic "liberal" establishment, and the other from supply-side Republican mavericks -- are in theory "revenue neutral." That is, there would be a balance between winners, who individually would pay less taxes, and losers, who would pay more, with the Treasury coming out roughly even in the revenue "take."
The Democrats' bill -- the Bradley-Gephardt "Fair Tax" proposal -- would set tax rates from a low of 14 percent to a high of 30 percent, and would drop most deductions but continue to allow home mortgage interest, charitable contributions, state-local and property tax, and IRA/Keogh deductions. The catch is that these allowable deductions would be worth only the basic 14 percent rate instead of the current maximum of 50 percent. (Example: Presently, a $500 monthly mortgage payment actually costs a taxpayer in the 50 percent bracket only $250. But under Bradley-Gephardt, the $500 monthly mortgage payment would be worth a deduction of only $70, making his real cost $430 instead of $250.) And capital gains would be taxed at a maximum 30 percent rate, instead of the present 20 percent.
The Republican Kemp-Kasten "Fair and Simple Tax" (FAST) has a single rate of 25 percent, with special exemptions for wage earners and large families. It disallows state/local tax deductions; taxes capital gains (on a cost-indexed basis) at 25 percent, and reduces tax penalities on Social Security recipients who earn other income. Like Bradley-Gephardt, it would tax health insurance benefits provided by employers.
Both would also tax municipal bond interest, except for general obligation bonds, which would remain tax-free. Needless to say, there are other provisions of each bill, and many more differences than can be spelled out here.
Roughly similar schemes have been pushed for decades by reformers who have argued that the tax system, riddled with special benefits, is inherently unfair to most taxpayers, especially to wage-earners who have few if any of the "shelters" established for the wealthiest.
"At present, a prosecuting attorney would have no difficulty persuading an impartial jury to convict the federal income tax system on several counts: It diverts resources away from its most productive uses, it is complex, and it is unfair," according to "Economic Choices 1984," a recent Brookings Institution book edited by Rivlin.
But reform proposals have been regularly defeated in Congress by special-interest groups defending their constituencies.
" Now we have a very serious budget deficit problem. We've never been in this situation before," pointed out Rivlin, former director of the Congressional Budget Office. The national goal, she said, should be to "get the deficit down to zero by 1989," using all available means: tax increases and cuts in spending, including defense and entitlement programs.
But above all, it will take leadership by Ronald Reagan. "If the president takes the leadership, then there's a pretty good chance," said Rivlin.
The Reagan Treasury is coming up with its own version of a flat tax bill, reportedly with a 35 percent top rate for individuals, as well as shifts in the corporate tax structure lowering the statutory top rate from 46 percent to 40 percent, while withdrawing some of the accelerated depreciation breaks that were granted to business in 1981.
The conventional wisdom is that tax reforms can never be passed without a tax reduction "sweetener." But oddly enough, the deficit -- and the obvious need for a tax increase -- may in the end provide the essential political rationale for tax reform. For this to happen, enough people must be convinced that budget deficits can cripple the economy.
In this interim period between the election and the beginning of a second Reagan term, some elements of the administration appeared to be confirming on-the-record what they had been saying off-the-record during the campaign: that there's no way of attacking the deficit problem without a tax increase.
To be sure, the weakening economy raises some questions about the wisdom of a substantial tax increase in 1985. Rivlin said she doesn't anticipate a recession next year -- she regards the surprise dip in the real growth rate from 7.1 percent in the second quarter to 1.9 percent in the third quarter as an "aberration" -- and forecasts a positive 3 percent pick-up in the 1985 GNP.
Even so, that would be quite a come-down from the exotic 8.5 percent growth performance of the first half of 1984. At least this sort of down-turn or growth recession has one benefit: It shoots full of holes the supply-siders' pet theory that we can grow our way out of the deficit. Sooner or later, we'll have to take our lumps for the excesses of the past couple of years.