U.S. group, IMF call for tax rise Deficits held worse than higher levies

September 17, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- President Bush's rejection of new taxes was questioned at home and abroad yesterday when a prominent U.S. business group and the International Monetary Fund both asserted that an increase in federal revenues should come alongside spending cuts to reduce the deficit.

"Given the magnitude in the fiscal balance it will, in all probability, require revenue measures [such as new taxes] as well as expenditure cuts and controls," said Michael Mussa, research director of the IMF, presenting the organization's semi-annual "World Economic Outlook."

The Committee for Economic Development, an influential bipartisan business group, said it would prefer to rely on spending cuts for deficit reduction, but added: "If aggressive pursuit of domestic and military spending reduction is insufficient to reduce the deficit substantially, national savings should be raised by tax increases."

Issuing the conference's analysis of the United States' role as "a rallier of nations" in the global economy, A. W. Clausen, chairman of the executive committee of BankAmerica and a former president of the World Bank, said at a press conference: "Carefully structured tax increases would be less detrimental to the economy than continued federal deficits. . . . We certainly could understand the logic of some increases in taxes against consumption."

President Bush has ruled out any new taxes, and has produced an economic growth package based on a 1 percent across-the-board cut in individual income taxes, a reduction in .. the capital gains tax, other investment incentives and broad cuts in spending.

His Democratic opponent, Gov. Bill Clinton of Arkansas, has proposed a major public investment program with higher taxes from wealthy individuals and foreign corporations, a tax cut or credit for the middle class, and a reduction in the size of the federal government.

Both candidates have focused much of their economic programs on short-term job creation rather than on long-term deficit reduction to improve the nation's future economic prospects.

But Mr. Mussa of the IMF said: "What it really needs, urgently, is action that credibly will bring about this reduction in the deficit over the course of time."

The IMF's "Outlook" cited higher energy taxes and a 5 percent value-added tax on consumption as possible revenue raisers. Employer-paid health care insurance could also be taxed.

On spending cuts, the IMF called for "fundamental reforms" of entitlement programs such as Medicaid for the needy and Medicare for the elderly, further reductions in discretionary spending, and deeper cuts in defense outlays. Such a package of cuts and tax increases, phased in over the next five years, would produce revenues of about 5 percent of gross domestic product in 1997, it said.

The tax increases would initially depress economic activity, but over the long run they would be beneficial and by 2000 would probably boost national output by up to 1 percent, the IMF analysis concluded.

"Notwithstanding signs of recovery in the industrial countries, the expansion continues to be slow and uneven, and the balance of risks remains on the downside," it said.

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