Cut and Tax

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Over the long run, the Brookings economists believe, the tax system needs a complete overhaul. Under their plan, most traditional deductions would be disallowed, but taxpayers would be able to subtract from their incomes any money that they had set aside during the year in savings accounts, stocks or other investments. This provision would strengthen the economy by increasing savings and stimulating investment in new plants and equipment. By doing away with deductions, the Government could boost revenues while lowering tax rates. According to Brookings projections, Congress could increase receipts by $108 billion in 1989 and still drop the maximum tax rate from 50% to 38%.

The Brookings economists admit that budget balancing will be difficult and painful, but they argue that the only alternative is a burgeoning deficit that "endangers the future growth of the U.S. economy and undermines the ability of American industry to compete in world markets." Says Rivlin: "The best time to deal with the deficit is now. Every day we delay, we have a bigger problem to handle."

— By Charles P. Alexander.

Reported by Christopher Redman/Washington