Promises of No New Taxes Have a Hollow Ring

The fellow elected President on Tuesday can prattle all he likes about “no new taxes” (Bush) or “taxes as a last resort” (Dukakis), but if he truly plans to get through his term in office without imposing a new tax or tax increase, he is condemning himself and the American economy to a miserable four years.

“We need a tax increase,” a nationally prominent banker said in private conversation recently, “because the alternative is having international money markets force up interest rates and stop the economy every time they worry about your financial decisions.”

The banker was arguing for a tactical tax--a quick revenue raiser to reduce the government’s budget deficit--as opposed to a more ambitious tax to finance society’s unmet needs. His reasoning was simple: If the new President is to have any chance of controlling events, he must do something on taxes to balance the government’s recent heavy borrowings.

To explain: Governments finance themselves in two ways, by taxes and by borrowing--through government bonds. If government expenditures outrun tax revenues, bonds are sold to cover the deficit. And as the U.S. government has been running deficits--$155 billion in the latest year, more in previous years--it has been selling a lot of bonds, many lately to foreign governments and private citizens. Also, makers of goods around the world have taken in a lot of dollars because the United States has been buying more abroad than it has been selling.

Nervous Bond Investors

The inevitable result: There are a lot of overseas bond and dollar holders who believe that they should have a say on U.S. economic policy. They make their voices heard periodically in Treasury bond auctions, where they demand higher interest rates, or daily in the currency markets, where they drive down the value of the dollar--as they have in recent weeks, whenever they lack confidence in U.S. policies. Pressure on the dollar in turn makes bond investors nervous and forces the Federal Reserve to raise interest rates to make Treasury bonds more attractive.

To be sure, nations are interdependent. Makers of Japanese cars, German chemicals and French wines got their dollars because Americans bought their goods as the U.S. economic engine pulled others to prosperity in this decade. So there is a sense of common interest, of what President Lyndon B. Johnson put so graphically when he said: “Don’t spit in the soup, we all have to eat.”

Still, if the next President doesn’t do something about the deficits, he will face continued pressure. Whenever the U.S. economy gets up a head of steam, foreigners fearing inflation will throttle it through the currency markets. He will preside over a stop-go economy and never have enough money to really accomplish anything.

Bipartisan Effort

Which is why the winner on Tuesday may well reach for a tax to get the lenders off his back. And if he does, he’ll find Congress ready to cooperate. Political pros in Washington are already saying the ideal time for a tax bill will be early in the new Administration when every new President enjoys a honeymoon period and when the currency markets are expected to test his mettle. That would inspire a bipartisan effort to deal with the deficit.

What about campaign promises? “The time comes,” a Washington pro says flatly, “to stop being a candidate and start being a President.”

OK, what kind of tax? Probably a gasoline tax. Definitely not an income tax. And possibly, but not likely, a new form of levy called a value-added or consumption tax.

The goal is to reduce the $155-billion deficit by $30 billion a year, half through spending cuts and half through taxes. Which is why a gasoline tax--or oil import fee that works out to be the same thing for consumers--may be all that’s needed. A 15-cents-a-gallon tax on the 130 billion gallons of gasoline Americans use annually would raise $19.5 billion. Minus exemptions for hardship cases, such a tax could raise $15 billion--an amount that, coupled with spending constraints, could solve the deficit problem.

The problem of a treadmill economy would remain, however. The federal government faces big bills--$50 billion for failing savings and loans alone. And lawmakers rule out tampering with the income tax to pay them.

But the idea of a value-added or consumption tax is gaining attention. A VAT is a kind of national sales tax that is praised for encouraging saving--you only pay if you buy things--but criticized for hitting the poor harder than the rich and for being too tempting. As the tax is incorporated in the price of the goods, people aren’t always conscious of paying it and politicians can raise it with impunity.

It’s an idea worthy of consideration, but passage of such an all-encompassing tax is unlikely until a greater consensus emerges in Congress and the country as to what the nation’s priorities should be. Maybe the guy who wakes up President on Wednesday morning can build one.