With the shift of attention on the budget from the Senate to the House of Representatives, it is time for some serious talk about taxes. Trying to keep the discussion of the expenditure side of the budget separate from discussion of the revenue side while simultaneously professing great concern about deficits makes no sense. For the president and most other Republicans, this strategy is ideologically motivated. Some Democrats may go along with the strategy out of fear for their political lives. But good politics, in this case, is poor policy.
First, and most important, ignoring the tax side of the budget delays needed action on the deficit. It may seem the Senate has solved the problem without resort to taxes; but even in the unlikely event that the House were to come up with an quivalent level of expenditure cuts, and even if the economy performed very well, the deficit would still be close to $100 billion at the end of three years -- higher than what the president himself labeled "a budget out of control" just a few years ago. By putting taxes back on the table, we can do better than this. Although tax increases are often dismissed as anti-growth, the evidence suggests that the alternative -- living with deficits -- is far worse. Deficits not only drain available savings from growth-producing investment in factories and new equipment, they also undermine our ability to compete in world markets. Moreover, the longer we delay action, the bigger the inevitable tax increase, since each year's addition to the national debt necessitates that we dig deeper into our pockets to pay the higher interest charges.
A second problem with the cut-expenditures-only scenario is its simplistic assumption that virtually every dollar of direct expenditures is of lower value than even the most marginal of activities supported by tax subsidies. Should we cut every possible dollar of health-care expenditures for the poor or the elderly before we raise a dollar of revenue by placing reasonable limits on the deductibility of employer-provided insurance for working- age families? Should we terminate job training centers for disadvantaged youth before we scrutinize tax write-offs for the purchase of books, computers, trips abroad and other work-related "educational expenses"? Should we eliminate revenue sharing with local governments when we haven't touched the nontaxability of interest on municipal bonds, which serves the same purpose but at a significantly higher cost to the taxpayer (because the assistance is delivered indirectly and thus less effectively)? And quite apart from loophole closing, might not the American people prefer paying higher taxes to living with continuous deficits if they understood that these were the choices? Unfortunately these are not the questions that are currently being debated.
The third problem with treating taxes as a last-resort deficit reduction measure is the largely hidden implications for who will shoulder the burden. By tackling business subsidies, and such middle-class benefits as student aid and school lunches, the president's 1986 budget proposals called for far more equality of sacrifice than his earlier budgets. Even so, his latest proposals, or any similar package, such as the one just adopted by the Senate, would have a far more unequal impact on the well-being of families at different income levels than would an across-the-board increase in taxes. In short, the cut-expenditures-only strategy would contribute to already growing disparities between those who are comfortably well off and those who are not. If this is what the public wants because it believes current expenditures are wasteful (some are) or overly redistributive, fine. But these distributional implications should at least be debated.
Advocates of tax reform quite naturally want to keep it from being derailed by attempts to raise revenues to reduce the deficit. And there is some merit to keeping Congress' feet to the fire on expenditures. But the process of drafting and phasing in a comprehensive piece of tax legislation could easily take a year or two. And we have already pushed quite hard on the expenditure front. In the meantime the whole economy may be derailed if we don't put expenditure cuts and tax increases on the same deficit-reduction track.