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Two senators offer a radical, sensible way to cut the deficit

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, R-N.M., and Sam Nunn, D-Ga., are co-chairmen of the Strengthening American 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 our 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 be taxed."

Taxation would be on only that part 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, ending complex measurements of depreciation and amortization.

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 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 locked in law before tax increases are approved.

Trouble is, when Nunn, Domenici and a few others recently proposed an entitlements cap, it took the interest groups (the elderly, agriculture, labor, veterans and scores more) just two hours to send a flood of angry telegrams to Senate offices. This was an example of what the National Journal's Jonathan Rauch calls "demosclerosis" and conservatives call "reactionary liberalism" _ defense of the status quo by everyone with an entitlement. Demosclerosis would be doubled in intensity when tax lawyers got into the act, defending their clients' favorite tax code sugarplums.

Still, the commission's report is evidence that the nation's fiscal and economic problems (as distinct from its cultural and behavioral problems) are problems not of intellectual mystery but of political will. And to a nation rightly anxious about its trajectory, the commission, quoting one of its members (Dwyane Andraes, CEO of Archer Daniels Midland) says: "If you don't change your direction, you'll wind up where you're headed."

Washington Post Writers Group

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