Conservative economists who support the Reagan administration warn the President to go slow on the three-year, 30 percent tax cut program incorporated in the Kemp-Roth plan. The congressional battle starts this week.
Reagan economists have been united till now and hailed the White House victory in cutting the federal budget in Congress last week. The second step is tougher; the "old guard" Reagan economists urge caution.
Herbert Stein, a top economist for the right-of-center American Enterprise Institute (AEI) and a pillar of the conservative establishment, warns that drastic tax cutting may stimulate inflation:
"Mr. Reagan faces more ominous economic conditions than has any president since Roosevelt," Mr. Stein writes in the current AEI "Economist." There is no comfortable way of ending inflation, he warns.
The "failure" of the Reagan administration to emphasize the risks involved in fighting inflation is "cause for concern," says Mr. Stein. He urges a policy of continued "fiscal and monetary restraint" rather than a drastic tax cut.
Another leader of Reagan "old guard" economic supporters, Arthur F. Burns, one-time chairman of the Council of Economic Advisers, also cautions over the Reagan-Kemp-Roth tax cut. Speaking in Cincinnati last week, he said the proposed cut "is larger" than "most members of the President's committee of private economic advisers had contemplated."
Mr. Burns, a respected voice in Republican councils, testified against the Kemp-Roth program before Congress last winter. "I would not cut personal income taxes at all at this time," he told the Senate Budget Committee.
Republican legislative leaders adopted the Kemp-Roth economic theory before the 1980 presidential election with the idea that a slash in income taxes would unleash a burst of economic productivity which would pay for itself and would produce more federal tax revenue, not less. This was on the basis of studies by "supply side" economist Arthur Laffer, quantified in his so-called Laffer Curve. The program has split Reagan economists -- the Stein-Burns "old guard," and the "young turks" or economic activists, whose leader is David A. Stockman, the head of the Office of Budget Management.
The Republican National Committee embraced Kemp-Roth economics before the congressional midterm election in 1978, and in July of that year issued a "press kit" in which GOP national chairman Bill Brock declared: "The Republican National Committee, backed by the most complete agreement on an economic issue in modern Republican history, is about to launch a top-priority campaign to take the issue of badly needed, meaningful tax cut for all Americans directly to the people."
In 1981 many economists agree that the time has come to consider a tax cut to balance off the upward "bracket creep" of taxes produced by inflation. But the Republican leadership has generally dropped the self-liquidating argument in favor of the Kemp-Roth proposal.
Inflation is running so high that the government is paying the steepest interest rate in history on 30-year bonds. It means that the financial community doesn't believe inflation has been defeated. During the 1980 primary campaign for the Republican nomination Mr. Reagan supported the Kemp-Roth formula, but the man who ultimately became his running mate, George Bush, called it "voodoo economics."
Rival forces may move to a compromise. Democrats appear to favor some reduction, although not the blanket three-year, 10 percent across-the-board program, accompanied by quicker tax write-offs on factories and eq uipment.