COLUMN RIGHT : Forget Taxes; When in Debt, Stop Spending : Today’s deficit was built on wild miscalculation of revenues.

When President Bush broke his word and hiked our taxes by $166 billion, he promised that it would help reduce the deficit. However, not only did the budget deficit rise by $803 billion over the next five years in place of the promised $500-billion decline, projected revenues fell by $297 billion. In effect, the hike lost nearly $2 for every projected $1 rise in revenue.

Of course, the government will blame this on the recession, but policy-makers knew that a recession was in the cards before they raised taxes. Yet they proceeded with a policy that every school of economics says is counterproductive.

Tax hikes take a toll on economic activity and reduce the growth of the revenue base. During an economic slowdown, revenues are falling automatically with the decline in sales, profits and incomes. In such a climate, a tax increase contributes to the economy’s decline.

The recession of 1981-82, for example--during Paul Volcker’s tenure as head of the Federal Reserve--cost the Treasury more in lost tax revenues during 1982 and 1983 than the Reagan tax cut did. The two-year static revenue cost of the tax cut totaled $118 billion. The recession, however, stopped all growth in federal tax receipts for two years and deprived the Treasury of about $140 billion in revenues.

In a miscue of policy control, the Reagan Administration added a major tax increase to this recessionary climate--the Tax Equity and Fiscal Responsibility Act of 1982. Its purpose was to reduce the revenue loss of the 1981 tax cut by repealing most of the business-tax reductions.

The Treasury estimated that the measure would raise $229 billion from 1983 to ’87 and reduce the cumulative deficit from $636 billion to $407 billion. The tax increase passed, and by the end of the year the deficit estimate had tripled to $1,248 billion. The actual deficits for that five-year period totaled $976.2 billion--240% larger than the tax hike advocates had predicted.

Tax increases add to red ink for another reason. Governments always forecast more revenues from tax increases than materialize. These optimistic predictions encourage the continuation of spending, but because the revenues are “phantom receipts,” the deficit persists and sometimes widens.

After cutting taxes in 1981, the government decided to regain the revenues through a series of tax increases. Every year saw a tax hike. Some were large, and some were small. Altogether, legislated and unlegislated (bracket creep) tax increases more than offset the 1981 tax cut by several hundred billions of dollars. The budget deficits, however, persisted, and today, after another large tax increase, the budget deficit has hit record highs.

If the recession is lengthy or the recovery sluggish, the red ink will persist. Politicians will blame the economic doldrums on the deficit and promise better times if taxes are raised to balance the budget. The tax hikes will lead to more spending of phantom revenues and to slower growth of the tax base.

States are not immune to this process. The cessation of the long Reagan expansion has left gaping holes in the budgets of states that failed to plan for a rainy day. For example, California has a pit $13 billion deep. Judging from New Jersey Gov. James Florio’s tribulations, a tax hike won’t help. Last year, New Jersey enacted the largest tax increase in the history of the 50 states, but sales and income taxes are running far below projections and the state continues to sink in red ink.

Ultimately, the incidence of taxation falls on economic growth. Inflation and redistribution are the hallmarks of an economy with bad incentives. As the United States moves in this direction, capital will leave as long-term investments look for a more hospitable climate.

For the past decade, Washington has made the wrong budget choice every year. The budget went into imbalance when the Fed froze revenues for two years as the price of its anti-inflationary policy. Spending, however, did not slow down and proceeded as if the revenues were there. The obvious solution was to bring spending back in line with revenues. This would have required two one-year spending freezes, which could have occurred separately during the decade. Indeed, a near-freeze occurred in 1987, which knocked $72 billion off the deficit. One more would have done the trick.

Instead, Washington relied on tax hikes, and in 1991 the budget deficit is estimated to be $318 billion--$100 billion above Ronald Reagan’s old record. It is fashionable to ridicule the “Laffer curve,” but the real joke is on those who believed tax hikes were the path to a balanced budget.