The Budget Deal: Fair? Effective?
HERE are some budget observations:
How should we evaluate the budget package now being considered by Congress?
Opinions vary.
Sam Nakagama, a Wall Street economic consultant, says: ``You can hardly exaggerate how important it is. It is an extraordinary change of course for America. It means we will try to deal with our problems in a responsible way.''
But Warren Smith, managing editor of the Bank Credit Analyst, Montreal, describes the deal as ``a modest disappointment.'' He says the deficit wasn't cut enough to lower interest rates.
Contrariwise, Michael Keran, chief economist for the Prudential Life Insurance Company of America, says the five-year, $500 billion deficit-reduction package could lower long-term interest rates by 1 percent. This assumes that the market regards a Congress-approved agreement as ``credible.''
Expectations are important. Because of an economic slowdown, the government deficit will actually grow at first. The deficit cuts are actually taken from what the deficit would be without the tax increases and spending cuts. The plan calls for balance by 1994.
``No one believes that,'' says Mr. Keran. But he says financial markets don't have to believe that zero-deficit promise to figure that sizable deficit reduction is credible.
Success in reducing the deficit still depends on congressional action in the months and years ahead, deal or no deal.
Is there real budget restraint in Washington?
During the military buildup in the early years of the Reagan administration, deficits and federal spending grew rapidly. Fiscal 1983 outlays were 8.3 percent more than in 1982. Outlays grew somewhat slower after that - 5.9 percent in 1988 and 7.3 percent in 1989. For the first 11 months of fiscal 1990, outlays have grown 12.8 percent from the same period a year earlier.
Probably most individuals would not consider themselves in an austerity program if they could manage to boost their outlays 12 percent in a year.
Will the package make taxes more progressive - taking a bigger percentage of the income of the well-to-do than of the middle class or poor?
At present, the national tax system, including those of the federal, state, and local governments, takes about the same proportion of income of the super-rich, the rich, and the broad middle class. The super-rich often pay a slightly smaller proportion of their income in taxes than the rich. The poor do pay less of their income in taxes.
Tax experts doubt that the new taxes will change that. ``My guess is it is going to be pretty much of a wash,'' says Thomas Field, executive director of Tax Analysts, a nonprofit group that publishes information on taxes. If that's not right, it probably will make the system more regressive, he adds.
The Tax Foundation in Washington recently claimed that the Tax Reform Act of 1986 preserved the ``progressivity'' of the personal income tax. By that, it meant that the top earning half of the population paid 94.5 percent of the total federal personal income tax collected in 1988. The highest 5 percent paid 45.9 percent of the total, up from 37.6 percent in 1979. But that is not the usual definition of progressivity. It probably reflects the fact that the rich have been getting richer, the poor poorer. A Foundation official admits the use of the word ``progressive'' had been argued within the business-sponsored research group.
Will the ``sin tax'' on cigarettes discourage consumption?
Yes, but not by much because the excise tax increase is small and spread out, says Jeffrey Harris, a Massachusetts Institute of Technology economist. His calculations show an 8 cent hike in the tax per package, if imposed at once, might shrink usage 2 percent. Mostly it discourages teenagers from getting into the habit. But 4 cents of the increase starts in 1991 and another 4 cents only in 1993. Some of the deterrent effect may be lost.
