The Gramm-Rudman proposal -- any version of it -- is a political and philosophical catastrophe for Democrats. The Democrats should recognize that reality and propose something entirely different. My proposal is a national value added tax. Here's why:
Since 1981, the Reagan administration has executed an astute pincer movement. Taxes were cut and defense outlays doubled, putting excruciating pressure on civilian spending. The only safety valve that prevented civilian outlays from collapsing altogether was the famous deficit, now running at over $211 billion.
The worry about the deficit has created a philosophical and political straitjacket for Democrats. Since the New Deal, the Democrats have had one core belief: the free market was splendid as far as it went, but it couldn't do everything. Ordinary, nonrich citizens needed a measure of opportunity and security beyond the grand lottery of the marketplace.
Thus the Democrats championed the use of the democratic state to leaven the arbitrary market. They sponsored Social Security and Medicare, the GI bill and FHA housing, college loans and mass transit, and so forth -- not just "safety net" programs, but opportunity programs for the broad, nonrich citizenry.
What the deficit-plagued Democrats of this generation seem to have forgotten is that these programs are basically popular. Every opinion poll suggests that a broad public wants government to provide more opportunity and security programs, not fewer. And, given reasonable taxing and spending priorities, society can afford them and society wants them.
The Democrats' obsession with Ronald Reagan's deficit has created a disastrous subtext for the current policy debate. It has reinforced the Democrats' doubt about the usefulness of public spending. It has created a fiscal context in which affirmative use of govern- ment seems arithmetically and politically impossible. Now comes the coup de gr.ace: Gramm-Rudman. Far from solving the dilemma, Gramm-Rudman will only make it worse. By requiring lockstep deficit reductions for each of the next five years, the Gramm-Rudman formula will intensify the pressure on Democrats to join Republicans in cutting what is left of affirmative government. It will leave the citizenry paying the same tax load, but getting less for it; it will further discredit the very idea of public spending to leaven the injustices of the private market; and it will leave Democrats even more philosophically adrift.
If Democrats can get out of Reagan's fiscal straitjacket, there are a host of unmet needs that require public remediation -- everything from repairing America's rotting infrastructure, to upgrading public education, to retraining our labor force so that America can compete in the new high-skill open global economy. All of these imperatives have been neatly shoved off the public agenda by the hammer of Reagan's deficit, which will now be intensified under the blows of Gramm-Rudman.
Here is a simple counterproposal. First, Congress should phase in an eight percent national value added tax, which is a form of sales tax. Democrats were brought up believing that all sales taxes must be regressive, but a VAT needn't be. It is possible to exempt food and other necessities; it is also possible to refund VAT taxes paid on, say, the first $12,000 of household purchases, to make the consumption of necessities tax-free. This would raise about $150 billion of new revenues.
Second, Congress should take $75 billion of that new money and use it to exempt the first $5,000 of earnings from the Social Security payroll tax. The very worst thing about our presregressivity of payroll taxes. A minimum-wage worker now pays more Social Security tax than income tax and a higher rate of Social Security tax than a millionnaire. Adding a progressive VAT and cutting payroll taxes on low wages would, on balance, make for a more equitable tax system. Finally, Congress should cut the bloated defense budget by about $50 billion by deferring purchases of unneeded exotic weapons. Taken together, this would cut the deficit to about $80 billion, a level the economy can live with. There is no need to accept the Republican assumption that the deficit must be zero.
With this program, the Democrats can get the deficit issue behind them, instead of having it dominate national discourse for the next five years. They can begin to put affirmative government back on the agenda.
Oh, I know that real income-tax reform would be better than a VAT. And I know that Walter Mondale's proposal for a tax increase proved politically fatal.
But think for a moment. Real tax reform is going nowhere. And poor Mondale didn't succumb because he proposed a tax increase, but because he seemed to stand for nothing else. If Democrats can get this deficit behind them, they can start to remember the rest of their agenda. Otherwise, Gramm-Rudman will only prolong the agony and have right-wingers chortling all the way to 1991.