In the 1980s, we cut income taxes, ran record deficits, borrowed the difference and pretended there was no tomorrow. Now that the bills are falling due, the voters are still kidding themselves that, by some miracle of the loaves and fishes, the deficit will be fed without any contribution from us.
That ain't gonna happen. But any acceptable package will have to include at least the following:
Higher taxes on the well-to-do. If politics precludes higher income-tax rates, the only alternative is to wipe out more deductions. This approach took root a couple of years ago, when Congress capped the size of the interest deduction on home-mortgage loans.
In the budget agreement that failed Friday, tax deductions would have been cut for taxpayers earning more than $100,000. Expect an even tighter squeeze in the future. "Cutting deductions counters the argument that the tax code has gotten too regressive, because it sticks it to higher income people," says William Goldberg of the accounting firm Peat Marwick.
As a way of raising taxes, eliminating deductions has a special virtue. There's no way around it. If tax rates were raised, more higher-income people would cut their tax liability by switching to tax-exempt municipal bonds. But what could they do if, say, the interest deductions were dropped on their vacation homes? If they wanted their second house, they'd have to pay for it, loan and all, with no help from the government.
A tax on gasoline. Adjusted for inflation and greater fuel efficiency in automobiles, the cost per mile of driving is lower today than it was before the oil embargo of 1973. It would still be cheaper, even after a 12-cent gasoline tax. The higher tax would also save energy and reduce our dependence on the Middle East -- a condition devoutly to be wished.
The elderly have to be part of any budget solution, along with all the rest of us. More than 28 percent of the federal budget is now made up of Medicare and Social Security. There is no hope, ever, of rationalizing federal finances without a contribution from people 65 and up.
The package so roundly rejected Friday concentrated the contribution in the Medicare program. It should perhaps have spread the burden by including the retirement-income program as well. At present, only part of Social Security income is subject to income taxes. For fairness's sake, it should all be taxed, just like any other form of income. That too would add to the progressivity of the tax system, because higher-income retirees would then pay more.
But even on the Medicare side, today's retirees are receiving far more in benefits than they paid into the program. For Part A, which covers hospital bills, a 65-year-old has paid around $7,500, says Gail Wilensky, head of the agency that runs Medicare and Medicaid. But that person will receive about $40,000 in benefits, with all the other taxpayers making up the difference. For Part B -- the doctor bills -- recipients get about $4 in benefits for every $1 contributed.
An understanding that "shutting down the government" will damage all of us, not just the "bureaucrats" in Washington.
First, those "bureaucrats" are the people who inspect meat for safety, run national parks, sign the elderly up for Social Security, reimburse Medicare claims and attend to hundreds of other services that citizens expect. If large numbers of government workers are furloughed, it will be everyone's loss.
Take the Medicare program, the idea of paying more for which has so angered the elderly. If the automatic Gramm-Rudman- Hollings budget cuts take effect, Medicare checks will be docked automatically by 2 percent. That's Medicare's share of the across-the-board budget cuts. And there would be delays before those checks would be received at all. Many of the people who process claims would be on furlough and looking for work.