Will the Tax Hike Work?

...Back in February, the Republican Senate rejected the Administration budget because its forecasts of economic growth were fancifully high and its projections of impending deficits implausibly low...

...Congress this year enacted a weapons procurement measure costing some $178 billion that actually gave the generals and admirals a bit more than they asked...

...In point of fact, the politics of the Congressional action are probably more important than its economic impact...

...Does the political will exist to affront either the military or the pensioners, a group notoriously inclined to vote...

...Even at the height of Wall Street euphoria major investors in large, uninsured certificates of deposit were moving out of them into Treasury bills and notes?one important explanation of the precipitous drop in the yields of three-and six-month T-bills...

...True, Salomon Brothers' renowned merchant of misery, economist Henry Kaufman, did predict lower interest rates during the next 10-12 months, yet he coupled the good news with an explanation of his change of mind that stressed continued recession and shrinking business demand for credit . There were also signs that the Federal Reserve was quietly pumping more money into the banking system, but earlier hints of Fed compassion had left the financial markets unmoved...

...Why, then, did the stock and bond markets respond so enthusiastically during the wild week beginning August 16 when the Dow Jones rose a record 81.24 points and volume broke all records...

...Poor Jimmy Carter never mastered this basic recipe for Presidential success...

...The choices were tough for both conservatives and liberals...

...What is now required are some drastic steps that will close this built-in gap...

...Compelled by threat of imminent torture to choose between these two scenarios, 1 would opt after only a glimpse of the thumbscrews for the second...

...On its actual merits, the bill compelled Democrats to decide whether or not moving toward equity in taxation was purchased at too high a price in social program attrition...

...The largest of these figures approximates one of the smaller cost overruns in a minor Pentagon weapons system...

...The fact is, major industries are in such bad shape and the prospects for re-employing laid-off workers are so dismal that only heedless optimists really expect the annual improvements in productivity and living standards once taken for granted as an American's birthright...

...Middle-class types and their financial betters will feel richer as they bask in their paper profits from a bull market and rejoice in real estate prices rising again...

...With great pain, the Senate constructed its own substitute...

...Consumers, encouraged by July's 10 per cent cut in personal income taxes and a 7.4 per cent cost of living increase in Social Security checks, will respond by buying more, to the benefit of laid-off factory workers who will return to reopening factories...

...In the wake of Lombard's debacle, it was revealed that the firm's 10 largest creditors held unsecured debts of $177.2 million, much of it commitments by the State Dormitory Authority and six New York hospitals...

...The Perm Square collapse in Oklahoma called into acute doubt the quality of management of Chase Manhattan and other major banks that had carelessly bought energy loans generated by Penn Square...

...In particular, Kemp's embittered followers detested the fact that, according to New York Times arithmetic, "More than two-thirds of the revenue raised...

...Not much more can be squeezed out of the hides of low income Americans...

...The big bucks are lodged in Pentagon appropriations and Social Security entitlements...

...The $98.3 billion, three-year tax increase that the House of Representatives reluctantly endorsed by a 226-207 vote on August 19 (the 51 -47 Senate vote was little more than a formality) is, in case you failed to notice, an open confession by the President that the supply-side snake oil of 1981 had induced an economic disaster trotting in double time toward calamity...

...The Drys-dale fiasco has been followed by the collapse of a second dealer in government securities, Lombard-Wall Inc...

...Nevertheless, within the context of a $750 billion Federal budget, the alterations on both sides of the ledger are mostly symbolic...

...These are probably numerous enough to equip a regiment of centipedes...

...The former could solace themselves with spending cuts of some $17.5 billion in the next three years, concentrated on "wasteful" social programs, with "progess" toward a balanced federal budget...

...Their white Democratic liberal colleagues were in no better shape...

...Both the President and Congress have agreed to postpone Social Security surgery until after the November electoral festivities...

...over the next three years will come from business...

...On the revenue side, the numbers are slightly more impressive?18 billion the first year, $38 billion the next one, and $43 billion in 1985...

...Demonstrating that even at age 71 a highly ideological politician can change his mind in the face of reality, Ronald Reagan converted his economic misadventures intoaperformanceof political mastery...

...Deciding that if he couldn't beat the legislators he would join them, Reagan embraced the tax bill, lobbied furiously for it, and chalked up still another "triumph" over Congress...

...Believers in the tooth fairy see the situation like this: Major financial operators, among them institutional investors, have at last been reassured sufficiently by "responsible" government action to expect continued decline in interest rates...

...However, true believers like Representative Jack Kemp (R.-N...

...A similar split among conservatives helps interpret the party breakdown on the final vote: a 123-118 majority for passage by Democrats, and a 103-87 favorable tally of Republicans...

...The measure exacted as the price of these reforms still another round of slashes in food stamps, Medicare reimbursements, and Medicaid funds...

...When second thoughts begin to intrude, the Dow Jones is likely to decline, interest rates again rise, and the fundamental weaknesses of the American economy resume their dispiriting impact...

...These ambivalences presumably explain why the Black Caucus Democrats split...

...Further, it is an odd recovery in which General Motors and other corporate titans continue to lay off workers and close plants, the farm belt is a disaster area, Texas unemployment edges above 7 per cent, and the pace of business bankruptcies and home foreclosures reminds the venerable of the Great Depression...

...In sharp contrast, the less sanguine worry about Murphy's Law (if anything can go wrong, it will) operating, as most of the time it seems to in human affairs...

...If all goes according to Congressional projection, an unlikely outcome, Federal spending will drop $3.7 billion in fiscal 1983 (commencing October 1, 1982), $5.9 billion the following year, and $7.9 billion in 1985...

...As the prime continues its descent and other rates, including those applicable to home mortgages and auto installment contracts, follow in its train, corporations will dust off their plans for new products and equipment, float new bond and stock issues, and initiate the long delayed investment boom upon which supply-siders have wistfully depended...

...It's been quite a year...

...The omens are not promising...

...They were torn politically by the sense that a vote for the tax increase would redound more to Republican than Democratic credit, and the fear that a vote against the measure would stigmatize them as big spenders...

...Y.), keeper of the sacred flame of the supply-side faith, accused the President of betrayal...

...concluded that the 1983,1984 and 1985 deficits would balloon above $200 billion unless the Treasury retrieved some of the lost revenues rashly auctioned off to the highest business bidders a mere year ago...

...Liberals had their own troubles...

...A little later, that unexpected tax reformer Senator Robert Dole (R.-Kan...

...Here we enter the realm of mystery and conjecture...

...As Business Week sourly concluded, "the bill leaves the fundamental deficit problem unresolved...

...Neither the tax increases nor the spending curtailments are nearly sizable enough to propel the economy toward the promised land of balanced budgets...

...New York City's Charles Rangel and Detroit's John Conyers said "Aye...

...most of the other Caucus members, including Brooklyn's Shirley Chisholm, Oakland's Ron Dellums and Los Angeles' Augustus Hawkins, voted "No...

...The new statute is a strange creature, embracing a number of tax reforms vainly pressed by liberals since the Kennedy days and approximating equity more nearly than is the custom of Congress' tax committees...

...Although the multiple martini lunch survives, Congress all but axed the tax leasing scam, applied withholding to interest and dividends, tightened the minimum tax upon wealthy tax avoiders, drastically modified accelerated depreciation on corporate fixed assets, and, less attractively, hiked levies on cigarettes (but not, to declare a personal interest, booze), telephone service and air travel...

...At least until greed overwhelmed fear among stock traders, the investment fraternity waited uneasily for additional shoes to drop...

...The entire financial system, they note, is in fragile shape...