A Call to Arms

By GEORGE J. CHURCH

The job is one "that no government in your country's history has ever done." The economic crisis "is every bit as profound as those we have faced in the past." In fact, "if we don't reform our economic policies . . . 10 years from now we won't even recognize the country." For openers, "we risk losing the standard of living that we have taken for granted for so many years." But Americans will make the sacrifices required -- most prominently, paying $150 billion or so in new or increased taxes over the next four years -- because they never fail to heed "alarm bells in the night."

All last week Bill Clinton rang those alarm bells, playing a thunderous overture to his address to Congress this week. He will probably need every decibel. The economic plan he outlines this week is stunning both in size -- some aides estimate it may shift as much as $400 billion in taxes and spending over the next four years -- and scope. Its scores of proposals cover items as small as layoffs and lesser perks for the White House staff, calculated to save a penny-ante $10 million a year, and as large as new energy taxes that could raise as much as $25 billion a year. Less than 30 days into his presidency, Clinton has crammed into one package most of the changes he wants to make in the next four years (the big exception is health-care reform). How much he can persuade Congress to enact, and how much political capital he has to spend doing so, will largely determine what options are open to the White House in 1994, 1995 and 1996.

It promises to be a difficult sell. Clinton, it is true, may be overstressing the sacrifice it will require -- possibly deliberately, in hopes of inspiring a gee-that-wasn't-really-so-bad sigh of relief. Still, he will be raising taxes on the middle class, rather than delivering the tax cut he promised during the campaign, and at least nicking the hide of that most sacred cow, Social Security. Though polls do show that people are worried about the deficit and want it reduced, it seems questionable whether many citizens could identify the ways in which an untamed deficit might cause more pain than the sacrifices needed to bring it under control.

The President makes a sound case that America's budgetary red ink in the long run will drown all hope of economic progress. To about 230 businessmen invited last Wednesday to the White House, Clinton gave some dire predictions about the U.S. "Ten years from now, if we don't change present policies": budget deficits exceeding $650 billion a year, or more than double even today's bloated figures; and a national debt equal to 78% of the country's total output of goods and services. But to many people that might seem a rather dry statistical apocalypse and not exactly imminent; the President cannot really point to any awful calamity likely to strike next week or next year. Similarly, Clinton in his town-hall television appearance last week sketched the joys of deficit reduction: "The United States doesn't borrow so much money. We have more of your tax money to spend on the education of your children, or on developing new jobs, or on health care. We keep interest rates down, and it's easier for you to borrow money in the private sector, so you create more jobs." Unimpeachable logic and in layman's language -- but still a rather complicated chain of cause and effect.

The latest TIME/CNN poll taken by Yankelovich Partners Inc. indicates that while voters buy the general idea of sacrifice, they will be very hard to convince on some all-important specifics. Asked if "people like you" should make sacrifices in order to reduce the budget deficit, respondents voted yes, 53% to 39%. But they overwhelmingly opposed two of the most likely proposals. Higher taxes on upper-income Social Security pensioners were rejected, 65% to 31%; federal taxes on all forms of energy, 74% to 23%. Those questioned did, however, favor higher personal income taxes on families making more than $200,000 a year, 79% to 18%. Despite the altruistic answers about sacrifice in general, these results were distressingly in keeping with an attitude of, sure, raise taxes -- but not on me.

The Administration, nonetheless, is pressing ahead. Its package was still being refined over the weekend, and some specifics are subject to change right up to the time the President goes before a joint session of Congress on Wednesday night. Clinton, as he so often does, has been reopening some issues that his advisers had thought settled. At the end of last week, he was still seeking a way to save some vestige of the middle-class tax cut he once promised, perhaps by slightly increasing the child-care tax credit for low- and moderate-income families. But at least the main outlines, and some specifics, were fairly well settled:

DEFICIT-CUTTING AMBITION In January, Clinton promised to cut the budget deficit for fiscal 1997, which begins in October 1996, by $145 billion. The latest official forecast of the 1997 deficit, by the Congressional Budget Office, is $319 billion, but according to some congressional sources, the Clinton Administration has drawn up if-nothing-is-done estimates of $357 billion or even $384 billion. After Clinton mentioned the $145 billion figure, some of his aides began backing off, saying the important thing was simply to get the number moving down, and giving the impression that the President might settle for $70 billion to $100 billion. That now appears to have been a game intended to damp down expectations in the financial markets and among pundits, so that they could be pleasantly surprised when the original target was reinstated. "We are still pushing toward 145 ((billion dollars))," says a top official. "It could be 135, it could be 142, it could be 138. Look at 140, and go a couple ((billion)) either way." One irony: the country will not be certain whether Clinton has met his $145 billion goal until September 1997, long after his first term is over.

BALANCE Budget Director Leon Panetta once said he would shoot for a ratio of $2 in spending cuts to every $1 in tax increases. Clinton's lieutenants have been unable to find that much spending to cut, though, and are now striving just for "balance." Moreover, they may be able to get a 1-to-1 ratio only by playing semantic games: labeling as "spending cuts" what are really tax increases on heavily subsidized Social Security recipients, people who take home-mortgage deductions on their income taxes and others. Social Security taxes, for example, are counted against spending on pensions and the like; an increase in tax collections reduces net outlays and thus qualifies, to government accountants anyway, as a spending cut. All this will give Republicans reason to hoot again at tax-and-spend Democrats.

ENERGY TAXES The big one, in terms of money involved, numbers of people affected (just about everybody) and vehemence of opposition. Though Administration officials were insisting late last week that the type and amount were still unresolved, the choices had apparently narrowed to either an ad valorem levy, essentially a sales tax on the wholesale price of fuel, or a BTU (British thermal unit) tax based on the heat content of fuel. Either would apply to every kind of energy -- coal, oil, natural gas, nuclear and hydroelectric power -- and for every use -- running cars and trains, heating homes, firing factory boilers, generating electricity. A 5% ad valorem tax would raise about $18 billion a year over the next five years. A BTU tax, which Clinton is said to lean toward, could be tailored to bring in just about any amount of money desired, but would probably be aimed to raise $18 billion to $25 billion a year. At the $18 billion level, either would cost an average family about $100 a year in price increases forced by the tax hikes.

Opposition will be bitter. Truckers and other big fuel users are claiming that energy taxes depress the economy and wipe out jobs. They have been joined by the very liberal Citizens for Tax Justice, which complains that energy taxes would hurt the poor and middle class. The Administration would probably try to give back some of the money to the poor in the form of a higher earned- income tax credit or some similar device. The Administration's essential argument is that it needs the money, and this is one way to raise it that also promotes energy conservation and helps curb pollution.

ENTITLEMENTS Pensioners with incomes of more than $32,000 a year for couples or $25,000 for singles now pay income tax on 50% of their Social Security receipts. That would be raised to 85% if Congress approves a virtually certain Clinton request -- and it may. The President tested out the idea on 22 congressional Democrats whom he invited to the White House for a 90-minute chat Thursday. Somewhat surprisingly, in view of the TIME/CNN-poll figures, all 22 reported that the idea had been favorably received in their district. Said Tim Penny of Minnesota: "It appears to have survived the coffee-shop test." Several legislators said a start on reining in Social Security, the biggest of all entitlements, would make it possible later to examine others: veterans' benefits, for example. Clinton has been talking about taking a whack out of some other entitlement programs even this year, but so far not in very specific terms.

INCOME TAXES An increase in the top individual rate to 36% or more, from 31%, is nearly certain, probably for people with incomes of more than $125,000 a year for singles and $200,000 for families. Congress has already voted a 10% surcharge on $1 million-plus incomes that Clinton will happily sign. Under his plans, the alternative minimum tax on people who get high incomes from sources sheltered from ordinary taxes -- partnership investments in real estate, oil and natural gas, for example -- would probably be raised to 28%, from 24% now. And the President called businessmen to the White House last week partly to tell them to their face that he intends to raise taxes on their company profits. The corporate income tax is supposed to go from 34% to 36%, or whatever the top individual rate becomes. The two must be the same to prevent owners of closely held corporations from shifting income from corporate to individual accounts, or vice versa, to take advantage of a lower rate.

Some of these increases will be big moneymakers: a 36% top rate on individual incomes could bring in $60 billion over four years. But others are largely symbolic, designed to demonstrate to the middle class that if its taxes are being increased, fat cats who benefited heavily from the Republican tax cuts of the 1980s are being hit much harder. Standout example: a proposed limitation on the ability of companies to deduct "excessive" salaries paid to chief executives and other high officers. Clinton says it would have "relatively small dollar impact ((maybe $300 million the first year)) but great significance to the American people."

BACKDOWNS AND DELAYS Some tax boosts once widely talked about will not appear in the Clinton program. Treasury Secretary Lloyd Bentsen, House Ways and Means Committee Chairman Dan Rostenkowski and other veterans of the bloody inheritance-tax wars of the 1970s successfully counseled the Administration not to fight that battle again. Clinton's aides found that eliminating mortgage-interest deductions for second homes would hit hard at many people who are decidedly not rich. "It turns out after you study it that a lot of autoworkers have cabins in Michigan," says a presidential assistant. Instead, the Administration is likely to propose limiting deductions to the interest paid on the first $300,000 of mortgage principal -- on first and/or second homes, combined.

Clinton very much intends to propose higher excise taxes on liquor and tobacco and a new tax on generous health-insurance benefits provided by employers to their workers. But he will not suggest these important, big-money items this week. Instead, he is saving them to offset what could otherwise be the budget-busting costs of health-care reform.

SPENDING CUTS The White House is in something of a bind. Tax increases can be made, or made to appear, equitable by spreading them over enough people. Spending cuts tend to target particular people -- worse, constituents of particular Congressmen, often Democrats who have won re-election by boasting that they kept in the budget spending programs that benefit their district. On the other hand, some Republicans who are scarcely enthralled by tax increases might buy them as the price for reducing the size of government. "If he does what he promises, he's going to get a lot of bipartisan support," says Wayne Valis, a former Reagan Administration official who is now a lobbyist.

Not surprisingly, the Administration has been far less specific about this important aspect of its program than about its tax plans, and what it has stressed publicly tends heavily to the symbolic. The cuts in White House staff and in government-wide employment and perks -- chauffeured limousines for top officials, cheap mess halls, riding stables -- were designed to demonstrate to the public that the government too is pulling in its belt.

Defense Secretary Les Aspin is identifying reductions in the Pentagon budget totaling $50 billion over four years, in addition to those planned by George Bush, with a down payment of $8 billion to $10 billion this year. Space projects and other federally funded big science programs are also in for a heavy hit. In many cases, though, the targets are being selected on the basis not of economic or social merit but of simple vote counting. Clinton is likely to take a hard whack out of funding for the space station, at the risk of offending Senators from California, Texas and Florida, but will not similarly slash money for the Texas-based Superconducting Supercollider. No point in giving the Texans an additional grievance.

QUICK STIMULUS For all his emphasis on deficit reduction, Clinton still intends to start with immediate spending increases and tax cuts, totaling about $31 billion over two years. The spending will include $4 billion for extended unemployment benefits; $7 billion for road building, waste-water- treatment facilities and other infrastructure projects; and about $4 billion for miscellaneous needs, including hiring new meat and poultry inspectors and expanding child immunizations. The tax cut will be a credit for business purchases of new plant and equipment. The justification is that the economy still needs a quick boost because, though production is now growing swiftly, employment is not. Downside: the program will take effect well before any of the austerity measures, adding perhaps $30 billion to the deficits that Clinton will then try to reduce.

INVESTMENT Clinton continues to insist on combining deficit cutting with long-term investment designed to promote social reform, increase employment and make the economy more productive. Some of his ambitious projects -- creation of a national police corps, a job-training apprentice program, national service as a way for college students to repay government-backed loans -- are being greatly reduced or begun only as pilot programs in order to save money. But he still intends to spend on such projects as high-speed commuting trains, a nationwide data "highway" connecting computers nationwide, and promoting research in emerging technologies. There will be some tax cuts too: Clinton intends to extend tax incentives to companies for investment in inner cities. He is even committed to that darling of Republicans, a targeted capital-gains-tax cut, though he insists it would be carefully focused to reward long-term investment in new, small companies. Some of these projects will obviously reduce the deficit-cutting effect of his bigger tax boosts and spending reductions.

The President launched an all-out hard sell for his program last week with his TV appearance and meetings with business executives and legislators. The pace will pick up sharply this week: immediately after the speech to Congress, Cabinet members will fan out to radio and TV shows to plug the program, and some will be dispatched to their home state to begin grass-roots lobbying.

The opposition is mobilizing too. Republican leaders will blast Clinton as a tax-happy promoter of "class warfare," in the words of House minority whip Newt Gingrich. The United Seniors Association vows to have its members send 1 million letters to Washington protesting any tinkering with Social Security. But business groups, while hardly enthusiastic about higher corporate taxes, have been holding their fire; there are some hints that the U.S. Chamber of Commerce may wind up endorsing the plan. For all those who have spent years bemoaning deficits, the opportunity to do more than complain about them is finally here.

With reporting by Margaret Carlson, Michael Duffy and Dan Goodgame/Washington