A Remedy for Demosclerosis

GEORGE F. WILL

October 05, 1992|By GEORGE F. WILL

WASHINGTON — Washington. --Last week, while that spoonful of silliness called Perot was pondering whether to make of himself a gift to the nation, two of Washington's grown-ups, going against the grain of this political season, said something both radical and sensible.

Sens. Pete Domenici, the New Mexico Republican, and Sam Nunn, the Georgia Democrat, are co-chairmen of the Strengthening America Commission, whose report, if implemented, would give America much more change than Bill Clinton, the ''candidate of change,'' has contemplated.

The commission, organized by the Center for Strategic and International Studies and composed of political, business, labor and academic leaders, offers an intellectually -- although perhaps not politically -- plausible way for the nation to escape its crumbling, downward path toward a crabbed and mean future.

The nation's core dilemma can be put succinctly. For America's welfare state, demography is destiny. The population is aging and the elderly are the disproportionate consumers of transfer payments, particularly pensions and medical care. Spending on entitlements is rising three to four times faster than the economy is growing. But as brisk economic growth becomes more crucial (to generate revenues to which there are entitlement claims), two economic variables -- productivity and savings -- are varying ominously.

U.S. productivity -- output per worker -- is still higher than Germany's or Japan's, but its growth rate has slowed while productivity has accelerated in other major countries. Our savings rate, now at an all-time low, fell from 9.8 percent of gross domestic product in the 1960s to 3.6 percent in the 1980s, while Japan and the European Community nations save at a rate over 10 percent.

The commission's plan is to achieve faster growth by reversing the trends of both variables, using mutually reinforcing deficit-reduction and tax-restructuring strategies. The tax plan is breathtaking: ''Abolish the present tax code and enact progressive consumption-based income taxation within two years.''

The commission explains: ''A taxpayer would take annual income, add gifts and bequests as well as net borrowings, and subtract all savings -- basically net investments and the net change in his or her bank balance. The remainder would equal consumption, and the resulting amount minus exemptions would taxed.''

Taxation would be on only that portion of personal income or corporate cash flow not directed to savings, investment or capital formation. The tax table could be as progressive as policy-makers wish. All forms of income -- wages, interest, dividends -- would be treated the same. Investment outlays would be expensed immediately, thereby eliminating complex measurements of depreciation and amortization.

By exempting savings and investment from taxation, the commission's plan would eliminate the perversity of the current tax system, under which income that is saved is taxed twice -- when earned, and when it generates interest. This incentive for immediate consumption strengthens our culture's general bias against deferral of gratifications. Corporate earnings are taxed at the corporate level; if distributed as dividends, they are taxed as shareholders' earnings; if corporations retain earnings and stock values rise, stockholders are subject to capital-gains taxation.

The commission traces the pedigree of its idea back three centuries to Thomas Hobbes: ''It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.''

Unfortunately, the Democratic Party, which will control Congress for the foreseeable future and probably the executive branch for at least four years, is in an intellectual rut. It is wedded to the primitive notion of fairness expressed in Governor Clinton's banal and ideological desire to increase taxation of high incomes. (A 20 percent surtax on incomes over $1,000,000 -- Clinton talks of 10 percent -- would raise just $16 billion over five years. To finance today's deficit the government borrows $16 billion every 16 days.)

On the spending side the commission calls for a cap on entitlements other than Social Security. The commission envisions $2.75 in spending cuts for every $1 of revenue increases from the new system, with cuts to be locked in law before the tax increases are approved.

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