The World's a Stage, Especially Washington at Tax Time

PUNDITS sometimes speak of the "political stage." The term certainly applies to the performance of Washington politicians this week over a major tax bill. Their posturing was aimed at an audience of voters, not at making actual law.

According to the plot, Senate-House conferees were to work out a compromise yesterday between a bill passed a week ago by the Senate and a variation passed somewhat earlier by the House; the compromise was then to be sent to the White House yesterday - a day ahead of the deadline set by President Bush in his State of the Union message; and soon Mr. Bush vetoes the measure.

"It is in almost everyone's interest to have a veto," notes Stanley Collender, director of federal budget policy analysis at Price Waterhouse, an accounting and consulting firm.

Democrats want a veto so they can tell the electorate that Bush vetoed a tax cut for the middle class.

"The middle class of America has been socked long enough," Senate Majority Leader George Mitchell of Maine told the press the other day.

The president wants to veto a tax bill containing a tax hike (for high-income individuals) so that he can tell taxpayers, particularly conservative Republicans, that he has prevented more taxation.

Whether the White House and the Democratic-controlled Congress can eventually agree on a tax bill remains to be seen. "There is some question as to whether the two sides are really interested in a tax bill," Mr. Collender says. "Chances are they will just punt until after the election."

Most economists don't believe that a tax bill - if one were to be passed - would do much to boost the economy or, for that matter, be needed for that purpose. Many figure that the recovery is already picking up steam. Industrial production was up 0.6 percent in February. Housing starts jumped 9.6 percent in the same month. Inflation, measured by the consumer price index, was a modest 0.3 percent, while workers' earnings outpaced that inflation by 1.2 percent.

Erich Heinemann, chief economist of Ladenburg, Thalmann & Co., an investment banking firm in New York, says a sharp pickup in retail sales could result in a 3 percent annual growth rate for national output in this first quarter of 1992. If the actual statistics show this to be so when released next month, he expects the National Bureau of Economic Research to pronounce May 1991 as the end of the last recession. In other words, the recovery has been a slow one so far, but the economy will not have gone in to a double-dip recession.

The deficit in the federal budget is still expected to run "close to or in excess of $400 billion" in the fiscal year ending Sept. 30, Collender says. Lower interest rates should save some billions on interest charges on the national debt, annual charges now running around $315 billion. But the president's move to trim tax withholding rates on wages will add about $25 billion to this year's deficit.

The deficit will be about 6 percent of gross domestic product (GDP), nearly as high a percentage as in 1982 at the depth of the previous recession. Then this deficit percentage should decline rapidly to around 2.4 percent of GDP by fiscal year 1996, according to Congressional Budget Office projections.

Massachusetts Institute of Technology economist James Poterba offers one caution: CBO projections "always show deficits going down."

Federal debt as a percentage of GDP has risen from a postwar low of under 25 percent in 1974 to about 50 percent this year, and should level off around 55 percent in a couple of years.

To provide some scale on the importance of economic trends to the budget deficit, Mr. Poterba notes that 1 percentage point less economic growth than anticipated would add $26 billion to the deficit; a 1 percentage point increase in the unemployment rate adds $50 billion; and a 1 percentage point increase in interest rates on the outstanding debt increases the deficit by $16 billion.

"As we come out of the recession, things will get better," Poterba says.

Government revenues will rise more rapidly. Some recession-related expenditures will decline.

Congress will continue to have great difficulty cutting spending. But by mid-decade Washington may even be ready to make a serious effort to stop the rapid escalation in federal Medicare and Medicaid costs, Poterba says.