Reagan's tax cut: Could November be too late?

Ronald Reagan wants to "get the country back on its feet and moving again" with a $36 billion tax cut in 1981 -- a proposal solidly supported by the platform committee at the Republican National Convention here.

Economic officials in the Carter administration say a 1981 tax cut is under consideration and will be decided in light of the mid- year economic review now under way.

But would tax reductions pull the US economy out of the current recession, which has been most pronounced in industrial areas like Detroit, where one out of three auto workers is unemployed?

Economists who do not necessarily agree on how a tax cut should be structured , find common ground on one assessment:

To offer Americans any short-term relief from the recession, a tax cut must come very soon.

"It will have to happen much earlier than looks likely to be countercyclical. If [tax cut] legislation is enacted in 1981, it may hit the economy as it is already improving on its own," assessed Jeffrey A. Nichols, chief economist with Argus Research Corporation in New York.

Mr. Nichols figures a tax cut would be good over the long-term for the US economy whenever it comes. But to lessen unemployment or shorten the recession, Congress would have to pass legislation before it adjourns Oct. 4, he stated in a telephone interview.

Given those time constraints and the controversial nature of a tax cut, some legislators, like Sen. Lloyd Bentsen (D) of Texas, have voiced skepticism that a bill could be passed this year.

Robert Gough, vice-president of national forecasting for Data Resources Inc. of Lexington, Mass., agrees that tax-cut talk must turn to action quickly if it is to soften the recession. In fact, he said it should come well before October.

"We need the signal in the next month or so," he said. He means that American consumers need to be convinced by then that a tax cut is coming, even though the legislation may not actually take effect until later, for them to open their pocket books and help stimulate business activity.

Mr. Reagan has called for a 10-percent reduction in personal income tax rates and faster write-offs for business investments in plants and equipment next year. It would be the first phase of a three-year, 30-percent reduction in federal income taxes, called for in the Roth-Kemp bill, so-named for Sen. William V. Roth (R) of Delaware and Rep. Jack F. Kemp (R) of New York.

Data Resources forecasts that the economy will rebound from the recession with positive growth in real GNP (gross national product) by the second quarter of 1981. With a tax cut enacted soon enough, economic growth could be restored in the first quarter, predicted Mr. Gough.

Carter administration officials have warned that a tax cut could further add to the underlying rate of inflation, still hovering at about 9.5 percent.

But tax cut advocates point out that government revenues will rise $32 billion in 1981 automatically as inflation pushes taxpayers into higher brackets and scheduled increases in social security taxes take effect. So tax relief of the $30 billion magnitude is more an offset to built-in tax increases, and would not be overly stimulative, they argue.

"This is a very bad economic slump and there is ample room for a little bit of spending without being inflationary. What consumers do with an extra $30 billion will not add to the inflationary spiral," maintained Mr. Gough.

The inflationary impact of a tax cut would hinge on how it is structured. Reductions aimed at encouraging more savings and investment are generally regarded in the current economic environment as less inflationary than those targeted at boosting consumption.

Mr. Nichols expects the recession to be sharp for the remainder of 1980. He sees real economic output of goods and services falling 7 percent in the fourth quarter, nearly as sharp as the 8 percent drop he expects second quarter figures to show when released.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.