President Reagan adamantly continues his opposition to the tax increase that this country now urgently needs. He argues, first of all, that it's not necessary. The growth of the economy, he believes, will eventually produce more revenue and close the deficit. Higher taxes will only slow down that growth, in his view -- and, as he said in his press conference this month, a tax increase could even trigger a recession.
But by this time it ought to be pretty clear to everybody that economic growth alone is not going to close the deficit. The country is now in the fourth year of a respectably strong recovery from the last recession, and there is no evidence whatever that the deficit is shrinking. On the con- trary, in the fiscal year that ended in September the deficit was larger than the year before. Meanwhile, the economy's growth rate fell last year to only 2.3 percent. That unexpectedly low number is another warning that the Reagan strategy is not reliable.
What about the argument that tax increases kill economic progress? The best witness here is the historical record. Federal taxes amounted to 3 percent of the gross national product at the turn of the century. By mid-century taxes were up to 15 percent and GNP per capita after inflation had more than doubled. Currently federal taxes are a little over 19 percent of GNP, and since 1950 GNP per capita has nearly doubled again. There is no inherent numerical relationship between the level of taxation and rates of economic growth. What counts is whether the tax money is being spent wisely and whether taxpayers think that they are getting their money's worth.
Mr. Reagan often speaks as though all public spending were a threat to the private economy. The reality, of course, is that much of the federal budget directly supports the private sector and contributes to its present and future growth. Aid to education is one obvious example. Another is federal investment in a transportation system -- interstate highways, airports, urban transit -- that directly improves economic efficiency. Federal aid to agriculture has been a steady force for dramatic increases in productivity and growth. The list could be carried on at great length.
Mr. Reagan is right when he says that, with a tax increase, there would be a danger of a recession. Unfortunately, there is equally a danger of a recession without a tax increase. Good public policy can mitigate the costs of recessions but, sadly, it can't prevent them. If the historical pattern prevails, another recession will begin before Mr. Reagan leaves office. If the country goes into it with federal deficits over $200 billion a year, they could easily shoot up over $300 billion a year before it ends. Federal borrowing on that scale would threaten to lock interest rates at very high levels -- a formula for a severe recession, or worse. That is one urgent reason to begin reducing the deficit while the economy is still expanding. This expansion won't last forever.
The Reagan administration's policies over five years have left the United States in a huge and unsustainable spending boom, consuming far more than it earns, and any remedy is going to be perilous. With luck, a tax increase would bring down the deficit sufficiently convincingly to make interest rates fall and swing money from consumer spending to investment. But no route out of the spending boom is entirely safe.
One alternative -- the likeliest one, if there is a deadlock between Mr. Reagan and Congress -- is to let things continue pretty much on their present path. That is far more dangerous. It means that the United States would continue to spend much more than it earns, becoming increasingly dependent on the foreign investors who are now lending the country about $120 billion a year. How long will foreigners keep pouring money into the United States at that rate? We don't know. Neither does the administration. But, again, it won't last forever.
If foreign lending drops while the Treasury is still borrowing at the present pace to cover huge federal deficits, the impact on the American economy will be the financial equivalent of a train wreck. That's another reality that Mr. Reagan's strategy does not acknowledge. The solution, and the only solution, is to begin raising taxes immediately.