In one sense, the great fiscal debate of 1986 has begun well, because it has come right to the point. The world is rapidly dividing itself into two schools.
One says it is impossible, as well as unwise, to try to reach the Gramm- Rudman-Hollings deficit reduction targets for fiscal year 1987 and beyond by spending cuts alone and that a tax increase is indispensable. The Post's recent series of editorials is a good exposition of this school's view.
The other school, of which President Reagan is the leader and I will be one of the warriors, says just the opposite -- that a tax increase would be damaging and that the Gramm-Rudman-Hollings targets can be met with perfectly reasonable and defensible savings in the nondefense part of the budget.
Without going into too much detail in advance of the budget, let me make a few points.
The first is to raise a red flag. The tax increasers argue not only that theirs is the best solution to the deficit but that it is an almost painless solution. Certainly their message is that a tax increase of some kind -- The Post talks of $150 billion a year -- would be less painful and less damaging than spending cuts.
That is much too glib an assumption. There is a very real down side to tax increases -- any tax increases, though some kinds of taxes are less damaging to economic growth than others.
If we raised individual income taxes, we'd be back in the old soup of high marginal rates and all of their disadvantages, which are now almost universally recognized. If we levied taxes on consumption -- directly or though a value-added type of tax -- we'd raise the price level and exacerbate problems of "regressivity." If we raised taxes on "business," we'd see them passed on to consumers in the form of higher prices or lead to less investment in plant and equipment, and therefore fewer jobs. This is neither the time nor the place to repeat all the ancient arguments over the merits and demerits of various kinds of taxes. My purpose is only to point out that higher taxes are not a cost-free solution to the deficit problem. To the extent that they slow the expansion of the economy, they are not even a solution, because the anticipated deficit reduction does not occur.
As the president has noted, after all the tax changes of the past five years of his administration, increases as well as decreases, federal revenues have returned to historical levels -- about 19 percent of GNP. This is about the average experienced during the past quarter-century, although the proportion did rise above 20 percent for a brief two-year period at the end of the Carter administration as rapid inflation and bracket creep worked their evil ways.
The budget deficit exists not because we have eroded our revenue base -- as is so often and so mindlessly proclaimed by people who never did like the president's 1981 tax reduction -- but because we have not been successful in controlling spending, which in the last fiscal year was more than 24 percent of GNP.
There is another point worth pondering by the tax-raisers. There is no evidence whatever -- from public opinion polls or actual polls on election day -- that the American people favor higher taxes as a solution to the deficit. This was, after all, the most clear- cut single issue in the 1984 presidential election, and 49 out of 50 states rejected higher taxes.
There remains one other issue dividing the two schools that should be addressed. Advocates of higher taxes as a deficit solution make a big point of how "small" the base for potential spending cuts is, given the president's decision not to touch Social Security and his insistence on modest further real growth for defense. For example, The Post -- inexplicably putting Medicare in the off-limits category along with the others -- comes up with a "cuttable" domestic base of only $320 billion.
We calculate the base considerably higher than that -- more than $400 billion. But even with a base that size, sheer spending reductions of as much as $60 billion would be a rather heavy hit.
But we won't be proposing sheer spending reductions of that size. First, $60 billion -- and surely $70 billion, which has been tossed around recently -- is an overestimate. We think the number is more like $50 billion, and if you take into account the 1987 effect of the current $12 billion 1986 sequester under Gramm-Rudman- Hollings, it's more like $40 billion. Second, we propose that a sizable part of the deficit reduction be achieved by increased user fees and asset sales of various kinds, which involve no spending program "cuts" at all.
When the president's budget comes out, along with its companion documents of explanation and advocacy, we believe the case will be made for achieving the legislatively mandated deficit reduction path without higher taxes. True, some of the domestic reductions may be politically difficult for members of Congress, given all the vested interests that we expect to be vocal in protesting each one. But when Congress considers the questionable merits of these programs and considers the alternatives -- increasing taxes, cutting defense just when we've got the Soviets at the bargaining table, or hitting the poor and the elderly -- I submit that the president's budget will be far from dead. It will bound out of its hastily constructed casket and break for the finish line.