Bringing down the house that Reagan built: Bush & taxes: the economics.

How did George Bush get into this mess? For the answer, look at the company he has been keeping: Richard Darman, Bob Dole, Bob Michel, and a gaggle of Democrats.

IN THREE FELL words, "tax-revenue increases," President Bush destroyed his credibility, revived the politics of envy, resuscitated the Philips curve, split the Republican Party, and made the Democrats' day.

Ninety House Republicans and about two dozen Republican senators have expressed their surprise and dismay over what the Washington Post called Bush's political gamble" on "the most significant policy reversal of his Presidency." But, watching the Democrats' media pundits manipulate the sensitive egos of Bush's aides, it was obvious that people without a compass were heading for trouble. The combination of a President driven by the urge to make government work, aides manipulated by liberal praise of their non-ideological, non-strident approach to politics, and the deficit bogy was bound to produce a revival of the Democrats' political fortunes.

The tragedy is that it was all for nothing. The deficit will not be reduced, and Bush will go down in history as a liar even if the charge is a bum rap.

Strictly speaking, President Bush's statement aimed at reviving his budget negotiations with Congress did not break his no-new-taxes pledge. "Tax-revenue increases" can refer to the revenues that would be gained by cutting the capital-gains tax rate or to revenues from economic growth. However, vicious headlines and political cartoons have helped take this explanation away from the Administration. So has Senate Majority Leader George Mitchell, who participated in the drafting of the statement and who told the Washington Post that aH the participants understood Bush's statement to be new and significant." Senator Mitchell said: Any attempts by White House officials or other Republicans to describe this statement otherwise are totally inconsistent with what occurred today and with what the statement itself says." White House Press Secretary Marlin Fitzwater's denial that Bush has broken his no-newtaxes pledge is further undermined by stories reporting that Bush's senior advisors had convinced him that the economy's fate is tied to the deficit and that his political fate is tied to the economy and not to his campaign promise. T IS extraordinary that ten years of budget struggles have taught those in the Bush Administration nothing and that they do not understand the Gramm-Rudman budget rules under which the government now operates. Under the GrammRudman deficit-reduction law, revenue increases do not reduce the deficit. The Gramm-Rudman formula sets spending at a level equal to predicted tax revenues, plus the targeted deficit, plus $10 billion. If the forecast shows that this targeted deficit will not be met, an automatic sequester cuts spending. In the case at hand, the purpose of higher revenues is not to cut the deficit, but to avoid a sequester that would cut spending.

Previous budget deals have led to higher taxes, higher spending, and higher deficits. It is easy to understand why. Static revenue forecasts allow the government to over-predict the revenues that a tax increase will generate. This allows it to increase spending while still certifying that the deficit target will be reached. Of course, the target is not reached, but the law does not require that the target actually be reached, only that a forecast say it will be reached.

In its June 1990 report, A Decade of Budget Summitry," the Tax Foundation reports that, "ironically, the fiscal years that were not preceded by budget summits actually resulted in the most real deficit reduction." For example, in 1984 the deficit was cut $23 billion by allowing spending to grow only half as much as revenues. In 1987 a near budget freeze knocked $71.5 billion off the budget. The easiest solution is another freeze. But this sane solution is too simple for Richard Darman, the hyperactive budget director, who is addicted to reading news stories about his budgetary exploits.

Ten years of supply-side economics shoved the dreaded Phillips-curve trade-offs between economic growth and inflation out of the public-policy arena. Before the supply-side revolution, the government attempted to compensate for declining incentives to produce by hiking aggregate demand. We had to pay for gains in employment and economic growth with higher rates of inflation. Supply-side policy broke this cycle, and we have enjoyed a record expansion without any rise in the rate of inflation.

Now, however, the government's policies are working to revive stagflation. An economy slowing from a resurgence of regulation and an adverse legal climate is now to be hit with higher taxes. The Administration intends to compensate for the adverse effects on growth by having the Federal Reserve create more money. In other words, as incentives decline, more money will be printed-the policy mix of the 1970s, which is once again guaranteed to revive the Phillips curve and calls for price controls and an "incomes policy."

It bodes ill that on the same day the media claimed victory in the fight for new taxes, other news stories reported regulatory halts to offshore drilling, logging, and land development, as well as financial re-regulation.

Bush's repositioning on taxes will work against a sound budget deal. His credibility is hurt, and he has lost the political lever that was focusing deficit reduction on spending reduction. Congress can now devise a package more to its liking, and Bush will have to accept it or pile the failure of his political gamble on top of his flip-flop on taxes. With the expectation of more revenues, he can no longer tell the spending lobbies, I'd like to help you, but can't because of the deficit." Indeed, politicians of both parties have lost the protection that the deficit provided against runaway spending.

The American Left has not forgiven supply-siders for reinvigorating capitalism by restoring personal incentives. The left wing wants income equality at all cost, and the Wall Street Journal's house bolsheviks, Alan Murray and Jeffrey Birnbaum, instantly seized on Bush's three words to declare that the first great economic and political debate of the 1990s is now under way: How should government redistribute the tax burden?" More progressively, they answer. The great drawbridge has been let down by the President," declared Senator Wyche Fowler (D., Ga.). It is ironic that Reagan's successor, terrified by the ancient nemesis of the Republican Party-the budget deficit-has renewed the assault on economic liberty that the politics of opportunity had laid to rest.