Skip to: Content
Skip to: Site Navigation
Skip to: Search

Behind the budget hoopla: Will 'supply side' work?

By Business and financial correspondent of The Christian Science Monitor / April 28, 1981


Just before Congress scampered off for its Easter recess, Sen. William V. Roth Jr. took his elephant for a walk. The elephant (borrowed from the circus) was intended to dramatize the size of the proposed Kemp-Roth personal income tax cut. Nicknamed "Roth-Kemp" for the occasion, the pachyderm strolled among the flowering azaleas of Senate Park accompanied by Senator Roth and aides carrying signs that read: "The Kemp-Roth tax cut: It's not peanuts."

Skip to next paragraph

This bit of political showmanship was a skirmish in a serious struggle. The Reagan administration is fighting to keep its tax bill intact, while critics complain the cuts would be too much of a shock for the economy and that they should be directed more toward increasing investment in new plants and equipment.

Until now, Washington's attention has been focused on budget cuts: a traditional issue for fiscal conservatives. But Mr. Reagan's tax proposals, centered on the Kemp-Roth three-year, 30 percent cut in personal income taxes, are more directly inspired by a belief in "supply side" economics -- a belief that many Republicans don't share.

So the larger issue at stake in the coming tax struggle is not Republicans and the desire for fiscal restraint against Democrats and the commitment to a better society through government programs. Instead, the question is one of economics: Will supply-side theory work, or is it just a crackpot theology?

The President's economic recovery program features just two tax measures: Kemp-Roth and the "10-5-3" depreciation allowance, which would allow businesses to write off new equipment faster. The administration says it wants these tax cuts to remain pure and simple, without being diluted or weighted down by congressional tinkering.

Administration aides say the tax relief would lift a yoke of burden from the economy, providing a strong incentive for business to invest and people to save, providing a stronger economy and increased tax receipts in the long run -- classic supply-side thinking.

And they want the boost to come quickly. John Chapoton, assistant Treasury secretary for tax policy, recently told the House Ways and Means Committee that the Treasury would not take a stand on tinkering with a subsidiary tax issue, because the administration felt all attention and effort should be focused on getting its first tax bill through.

But Washington sources say discontent in Congress means the economic recovery plan won't be able to scoot through Capitol Hill with its tax cuts untouched. The Kemp-Roth cut was controversial even before Reagan was elected, and opposition to it is well publicized.

And a thick Brookings Institutions study has questioned the administration's belief that Kemp-Roth would pay for itself through taxes skimmed from increased business activity.

The House Budget Committee alternative budget, one of two plans the House will consider as it returns from its Easter recess, has toned down K-R to a one-year cut. And the "hard rocks" of the Senate Budget Committee, conservative Republicans concerned about the budget deficit resulting from K-R, swung a key vote against the President's plan earlier in the month.