A daunting triple alliance: will the Federal government ever display enough courage--or know-how--to contain the triple-headed beast of Social Security, Medicare, and Income Tax reform?

• Author: Weidenbaum, Murray L.
• Position: Economics - Column

NOW THAT THE ELECTION campaigns are well behind us, we can look at the economy in a more dispassionate way. In that light, 2004, as widely anticipated, registered the strongest economic performance in quite a while. The combination of tour percent growth, two percent inflation, and rising employment does not quite qualify last year for the Guinness Book of World Records, but there is little reason to don sackcloth and ashes.

Of course, when assessing 2005 and beyond, there is no shortage of economic problems facing the nation. Policymakers in Washington are dealing with a variety of challenges. Let us start with the announced policy agenda of the Bush Administration. As in the President's first term, the emphasis is on fiscal policy, especially the revenue side of the budget. Attention is being given to reforming the Federal tax structure by shifting the tax base from income to consumption. Such a change has been underway in other industrialized nations for several decades. Nevertheless, it still is a controversial idea here at home.

Promoting savings via tax reform would be a fundamental, albeit partial, response to the desire to reduce the huge current account deficit by curtailing national dependence on foreign funds. Increasing savings, however, is not exactly a bumper sticker issue. Yet, focusing on this objective would be far more constructive than yet another harangue about outsourcing.

We must acknowledge several constraints that have been imposed on reform proposals. The first is that they be revenue-neutral. That is Beltway lingo for raising the same amount of revenue as the existing tax system. At the technical level, that is the standard way to evaluate alternative tax proposals. At a time of large budget deficits, that requirement also makes good sense on substantive grounds. It seems likely that we will have to forego the luxury of sweetening future tax reforms with new tax cuts.

That view is reinforced by the other revenue-restricting constraints being imposed on tax reformers. The most compelling is to make permanent the large, but temporary, tax reductions recently enacted. A related issue is extending the short-term reduction of the increasingly painful Alternative Minimum Tax, which expires at the end of 2005. Finally, let's mention the scheduled restoration of the full estate tax in 2011. Any constructive response to that situation will reduce the revenue base as well.

The President has appointed a Commission on Tax...