Taxes must rise to ease deficit, Stockman says

Former White House Budget Director David A. Stockman says a tax increase is ``imperative'' if the federal budget deficit is ever to be brought under control. ``I don't know how you're going to make these numbers ever add up without it,'' Mr. Stockman told the Monitor in an interview.

But Stockman, who quit as director of the Office of Management and Budget last August and is now promoting his controversial book ``The Triumph of Politics'' (Harper & Row), says he does not think an income-tax increase or an energy tax, in any form, is politically feasible.

Instead, he advocates a national sales tax and suggests the states collect it and take a portion of it.

At the same time, Stockman is leery of the tax-reform packages making their way through Congress. He is concerned that, like the sweeping fiscal changes he helped enact early in the Reagan administration, the reforms could have unpredictable consequences.

``The tax bill,'' he says, ``may be a good example of trying to do sweeping plenary change in one sitting in an environment where people are not very sure about the long-run implications.'' He says the ``out-year numbers'' -- five years or so from now -- may be ``soft'' and cautions that ``there's a lot of risk in doing something that big.''

Stockman, now with the Salomon Brothers investment banking firm in New York, is also skeptical of administration and private-sector economists who have predicted that economic growth this year will reduce the budget deficit.

He points out that ``the deficit in 1986 is running at the highest annual rate so far, and even if it improves in the last few months of the year you're still going to have, in my judgment, a deficit of $200-$210 billion.''

``You've got to put a pretty heavy discount on all of these early-season numbers they're using,'' he warns, ``because they always turn out a lot worse.''

The only reason there will be any improvement in the budget deficit in coming years, he says, is a dramatic policy change that has hit defense spending since last fall.

``The defense buildup is over -- they've lowered the boom. . . . On a de facto basis, that is how this deficit has been contained. When all else failed, Congress just dropped the defense buildup -- after it had started the thing in motion.''

But the defense-spending cut is both good and bad, he says. ``It's stabilized the deficit with a decent economy, but it's removed the last quiver of real-dollar reduction in the budget that was politically viable on Capitol Hill.''

Defense spending was so huge in the early years of the Reagan administration, Stockman says, that it created a ``pervasive backlash'' against any social-spending cuts and eventually had a negative effect on defense spending itself.

As for the much-debated economic consequences of chronic budget deficits, Stockman charges that they drove up interest rates and the value of the dollar, thus hurting United States industry and agriculture.

``Since mid-1984 we've had only tepid growth -- 1 to 2 percent a quarter on average. That's been the cost of it [the budget deficit]. It just put a lid on US output. I think that's a pretty big cost.''

Now, he says, the US is caught between the need for high ``real'' interest rates -- the difference between the inflation rate and nominal interest rates -- to attract foreign capital to finance continuing budget deficits and the desire for the dollar to fall, which would help restore US industrial and agricultural competitiveness in global markets.

The first course, he says, could eventually prompt protectionism with ``an intensity not seen since the '30s.'' This is because a strong dollar, which results from high US interest rates, makes US exports more expensive for foreigners to buy and makes foreign imports less expensive for Americans to buy.

The second course, he says, ``is tending strongly in the direction of value depreciation abroad, excessive ease at home, and, at some point when the oil-price cycle hits bottom, a rekindling of inflationary psychology and pressure.''

Stockman admits that in the first year of the Reagan administration he was the key implementer of policy that led to the fiscal problems and many of the economic problems that resulted. But he says he had a change of heart when he saw that the policy wouldn't work. He stayed on for four more years, he says, to try to bring about balance.

During those years, Stockman says, he helped push through several key revenue-raising measures, and he contends the budget deficits would have been much worse without them. The fiscal situation, he says, was ``mitigated substantially due to the initiative of the middle political leadership in Congress, and a few of us in the administration.''