On its face, the Gramm/Rudman anti-deficit measure passed by the Senate, seems to exempt only Social Security and unbreakable government contracts from its automatic spending cuts.
In reality, though, the exemptions are far, far larger.
For example, under Gramm/Rudman, if federal deficits exceeded the targets, the president would be required to cut such federal programs as Medicare and Medicaid, student loans, food stamps, environmental prgrams, school lunches and cancer research.
By contrast, federal subsidies such as the nearly $41/2 billion that General Electric enjoyed in the past three years would be exempt from the presidential knife, because G.E.'s subsidy came in the form of tax breaks, rather than direct outlays.
In all over $400 billion of G.E.-type subsidies -- more than twice the size of this year's deficit -- are exempt from Gramm/Rudman. How come?
It's because Gramm/Rudman only provides for cutting direct spending, where the government hands out checks. It exempts the tens or hundreds of billions of dollars that slip through Internal Revenue's net because of tax loopholes -- as in the G.E. example.
Is it proper to label that federal "spending"? Yes, because a dollar uncollected due to a tax loophole adds precisely as much to the federal deficot as a dollar handed out of the U.S. Treasury. Think of it this way: if the tenant in you basement apartment fails to pay you his $200 rent, that puts as big a hole in your bank account as if you had gone and spent the $200.
So when, in three recent years, General Electric earned nearly $10 billion of profits and yet contrived to pay zero tax (rather than the 46 percent rate in the law), that was tantamount to the U.S. Treasury handing General Electric a check for nearly $4.5 billion.
These so-called tax expenditures are more pernicious than direct-spending programs such as farm or maritime subsidies. Those programs face regular Congressional scrutiny, and if Congress doesn't renew them, they die.
Precisely the opposite is true of the tax expenditures. The loopholes are generally embedded in the permanent tax law. So if Congress fails to act (a natural Congressional proclivity), they endure year after year.
Second, tax subsidies tend to be less well targeted than direct outlays, often spraying benefits shotgun style, where a rifle-like program would do the job far more efficiently.
Third, for budget-balancing purposes, tax expenditures are far worse than direct outlays, for once enacted, their cost is essentially uncontrollable. So when Congress enacts, say, a corporate tax loophole, control over its cost passes out of Congress' and the president's hands and into corporate board rooms. If twice as many firms decide to avail themselves of that loophole, the government has no choice but to pay twice as large a tax subsidy.
All three points are vividly illustrated by the so-called DISC provision (short for Domestic International Sales Corporation), enacted in 1971 purportedly to induce American firms to increase their exports. At the time, its cost was estimated at a mere $100 million. Twelve years later, the actual cost had ballooned to $1.4 billion.
Moreover, to reap DISC's benefits, far from having to take specific export-stimulating steps, all a firm had to do was create a dummy corporation with nothing but a set of books and funnel its export sales through the dummy, even if those exports remain unchanged. Little wonder that a series of annual Treasury Department reports on DISC's effectiveness, beginning in 1975, ranged from "negligible" to "We don't know for sure." Yet a decade later, DISC, in modified form, remains stubbornly in the law.
Congress' Joint Economic Committee has estimated that under current law, tax expenditures will rise by about $40 billion a year. By 1990, they're predicted to reach nearly $600 billion. But unless the House insists on including tax expenditures as part the deficit problem, those colossal tax outlays will remain out of reach for budget-cutters.
That would be ironic for, under Gramm/Rudman, the first items to get the ax would be cost-of-living adjustments for programs such as school lunches, food stamps, civil service and military pensions, and payments to disabled veterans, the blind and the elderly poor.
So if the House goes along with the Senate version, and allows tax expenditures to rise freely while permitting pensions and the like to be eroded by inflation, that could produce the spectacle of the blind and the disabled poor subsidizing continued, undiminished tax breaks for General Electric and other corporate giants.