Two GOP economists say Reagan deficit plan must include tax hike

Walter Mondale's plan to cut the federal budget deficit should put pressure on the Republican administration to come up with a plan of its own. Two prominent moderate Republican economists who believe President Reagan will have to boost taxes as part of any such plan are Herbert Stein and Martin Feldstein.

Speaking of the Republican platform with its ''supply side'' emphasis on growth to remedy the deficit, Mr. Stein, chairman of former President Nixon's Council of Economic Advisers, said: ''I am not sympathetic to all that language about taxes - not committing themselves to increased taxes and even indicating there should be lower taxes.''

Mr. Feldstein, who resigned in July as chairman of President Reagan's Council of Economic Advisers, says, ''In the end (Mr. Reagan) will have to raise taxes.''

Now back at Harvard University and in a second job as president of the National Bureau of Economic Research, Feldstein added in an interview: ''I think the President is committed to seeing how much he can do without raising taxes. He will try to do as much as he can on the spending side.''

Such ''young Turk'' conservatives as Reps. Jack Kemp of New York, Newt Gingrich of Georgia, and Trent Lott of Mississippi and Sen. Robert Kasten of Wisconsin were responsible to a considerable degree for a GOP platform which says: ''Our most important economic goal is to expand and continue the economic recovery. We therefore oppose any attempts to increase taxes, which would harm the recovery. ... We favor reducing the deficits by continuing and expanding the strong economic recovery ... and by eliminating wasteful and unnecessary spending.''

Stein sees such a statement as a mere wish. He says the economy has not demonstrated the rate of growth that would be required to bring the budget into balance. Nor does he believe the next administration can cut spending sufficiently to eliminate the red ink. The Republicans already had four years - ''quite an opportunity'' - to trim spending drastically and did not do so.

''There isn't a big bundle of painless expenditure cuts around,'' he says.

White House Chief of Staff James A. Baker III keeps talking of the Grace Commission proposals for reducing federal outlays. But the major savings, such as those arising from alterations of civil service or military pensions, would come only far in the future, Stein says. Or the proposals require politically difficult, major policy changes.

Thus he thinks it was a mistake for the party to lock itself into a no-tax-hike pledge. Nor does he approve of the list of tax cuts proposed by the platform, cuts that would boost the deficit by perhaps more than $100 billion further if enacted. Speaking of the platform writers, Stein said rather sharply: ''They don't care very much about deficits. They believe that low taxes are a great selling ploy to the American people.''

Mr. Feldstein figures that deficit reduction will have to be on the ''top of the agenda'' for the government next year.

Both of these Republican economists have strong objections to supply-side economics.

Mr. Stein, who actually coined the term ''supply side'' in a 1976 paper, says there is ''always a certain core of truth to the supply-sider arguments. They have some effect. But not on the scale the supply-siders claim they have. They just run their argument into the ground. These people are frequently weak on the quantities.''

Here are some of the supply-side arguments and their rebuttals by more traditional economists like Stein and Feldstein:

Supply-siders maintain that cuts in marginal tax rates - the highest rate charged on an individual's income - will increase incentives to work and invest enough to get the economy growing faster, and thus government revenues will go up too.

Some extreme supply-siders have held that these extra revenues could even more than offset the government's loss of revenues from the tax cuts, although such claims make more-moderate supply-siders uncomfortable.

Conservative economists admit that some individuals may work harder and longer with lower marginal tax rates. Others may decide the extra after-tax income will allow them to work less time. So far, says Stein, there is no adequate economic study showing where the ratio between extra work and less work lies.

Whatever, Stein has done some calculations showing that an individual would have to increase his work hours enormously to produce enough revenues to offset a drop in taxes completely.

For example, a professional in the 50 percent marginal tax bracket, working 40 hours a week, would have to work an extra 343 hours a year to generate enough extra income taxes to offset fully a cut in his marginal tax rate to 30 percent.

Supply-siders also maintain that marginal tax cuts increase the incentives to save and invest.

Stein admits that corporate saving has increased with the 1981 cuts in corporate taxes. But he sees no such change in individual savings. The combination of the two has not offset the size of the deficit, he says.

''Savings available to finance private investment are lower than they used to be,'' he concludes.

Nor, notes Feldstein, has total gross private domestic investment (in plant and equipment, housing, and inventories) grown from pre-recession levels in relation to gross national product (GNP), that is, the total output of goods and services. It was 17.17 percent of GNP in the second quarter of this year, compared with 17.5 percent in 1955 and 17 percent in 1979, although down to 15 percent in 1980, a recession year.

In other words, so far the tax cuts haven't changed the investment level much. In fact, foreign savings have had to be used to finance the current level of investment.

This means that neither Stein nor Feldstein sees industrial capacity growing fast enough to permit national output to grow much faster in the long run than the usual 3 percent in real terms (after inflation) without boosting the inflation rate. Again, they argue that the supply-siders have their ''order of magnitude'' wrong when they see tax cuts stimulating investment, productivity, and capacity growth. So both economists, fearing inflation, want output to slow down from its current rapid growth rate.

The two also regard President Reagan as more moderate in regard to the budget and deficits than the supply-siders behind the Republican platform. Thus they expect him to ignore the platform recommendations in this crucial area if reelected.

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