HOW TO BALANCE THE BUDGET-FOR REAL
By FRANK LALLI MANAGING EDITOR

(MONEY Magazine) – No question about it. We must get the federal budget deficit under control. Talk about government waste. Some 14% of all federal spending is thrown away each year paying the $203 billion in interest on our $4 trillion national debt. And that ever-expanding waste of money will ultimately cripple the economy if we continue spending around $200 billion more than we bring in annually. This nonsense has to stop.

But how? Up to now, the raging national debate about how best to balance the budget sounds like a talk radio shouting match: Soak the rich! No! Dismantle the welfare state!

What's needed is a dispassionate look at what it will take to get ourselves out of this mess. Before we can address the deficit, we have to understand where our money goes each year. In addition to the $203 million for interest, the government shells out $21 billion for international aid (1.5% of all federal spending), $231 billion for domestic programs, including education, transportation and law enforcement (17%) and $294 billion for defense (19%). The major share of the budget, though, is absorbed by entitlements; they total $762 billion (49%), including $302 billion for Social Security, the biggest government program of all.

Those numbers illustrate a couple of inescapable conclusions:

The deficit nearly equals all domestic spending combined. Therefore, if we tried to balance the budget by slashing domestic expenses alone, we would have to eliminate virtually every program-shut down the FBI, stop maintaining our highways, close our national parks.

That points us to the big money in the major entitlement programs. But again, if we cut every penny of entitlements to the poor-and slashed benefits for the wealthiest too-we would still be in the hole for $170 billion a year by the end of the decade.

For the most part, entitlements don't go just to the poor or to the rich. At last count in 1990, virtually half of all American families got an average of $10,300 a year in entitlements, which include veterans' benefits, unemployment insurance and government pensions as well as Social Security and Medicare. And the more you earn, the more you're likely to get: families making less than $10,000 collect just $7,880 in benefits, vs. $16,190 for those making more than $150,000.

So, what can we do to cobble together the huge spending cuts we need? We can begin by recognizing that we will all have to do our share. The sooner we acknowledge that, the sooner the national debate will shift to choosing the wisest reductions and, yes, the fairest tax increase to get the job done.

After reviewing the budget plan recently proposed by Sens. Bob Kerrey (D-Neb.) and Jack Danforth (R-Mo.) of the Bipartisan Commission on Entitlement and Tax Reform, as well as other proposals, we've compiled the following list of options. Our list concentrates on actions that would not only deflate the deficit but would also spread the sacrifices as widely-and equitably-as possible. For the sake of comparison, we've noted each option's deficit-cutting contribution in 1999, when the annual shortfall is projected to be $251 billion. Please check as many, or as few, as you support, and send your response back to us so we can report on your preferences in what we hope will be a more enlightened national debate in 1995.

Tax all entitlements. Affects every taxpayer receiving entitlements. Average tax increase: $1,500 a year. 1999 savings: $68.1 billion.

Eliminate the mortgage interest deduction. Affects 27 million homeowners. Average hike: $1,900. Savings: $62.1 billion.

Progressively reduce entitlements for middle- and high- income households. Affects recipients with incomes above $40,000. Average cost: $3,800 a year. Savings: $47.9 billion.

Eliminate the deduction of state and local income taxes. Affects anyone who pays local income taxes and itemizes. Average tax hike: $980. Savings: $47.3 billion.

Adjust the government's CPI calculation to reduce annual inflation adjustments to benefits and income tax brackets. Affects every taxpayer and every recipient of inflation-indexed entitlements. Average cost: $135 a year. Savings: $5.6 billion. (The savings increase significantly as the cumulative effect of lower inflation adjustments builds in later years.)

Send this page, plus whatever alternative ideas you may have, to me directly at Money, Time & Life Building, Rockefeller Center, New York, N.Y. 10020.