"The supply-side shuffle" may be the top economic tune in Washington. But in New York the bond market has been reluctant to dance -- and a major Wall Street trade organization says it wants some changes made in the music.
In the last few weeks bond prices have sunk to new lows, reflecting investor concern about the long-term fate of the economy. President Reagan, stung by the implicit criticism of his policies, publicly pouted last week that Wall Street was "looking through a very narrow glass" at his economic program.
Privately, an administration official complains that New York's money men are so busy worrying about the possible effects of budget deficits that they can't see the long-range improvement he says Mr. Reagan's program will bring.
"Wall Street doesn't set bond prices," retorts George Ball, President of E. F. Hutton & Co. "Investors set bond prices."
Still, many New York money men don't regard Reagan's package as the greatest thing to hit town since the invention of the corporate dining room. They're supportive of the program as a whole, but many wish the tax cuts were targeted more toward business and investment.
The gross national product's (GNP) unexpectedly muscular first-quarter performance (it rose 8.4 percent after being adjusted for inflation) has only made them more anxious.
New evidence proferred by the Securities Industry Association (SIA) -- whose members account for 90 percent of the securities business done in North America -- claims that across-the-board personal tax cuts aren't the most efficient way to revitalize the economy.
Instead, a Data Resources Inc. study, commissioned by SIA, projects that a cut in the capital gains tax, and a reduction of the maximum tax on investment income from 70 to 50 percent, would yield the most GNP bang per tax buck lost.
"We think these two modest inclusions could do a great deal of good for the economy," says Hutton's Mr. Ball, chairman of SIA's tax policy committee.
The Data Resources study concludes that the Kemp-Roth three-year personal tax cut would increase GNP 65 cents for each tax dollar the Treasury lost in 1982. Reducing the maximum tax on investment income to 50 percent would produce $4.51 in GNP for each tax dollar forgone. And increasing the capital-gains exclusion to 75 percent would add $14.13 of business activity for each buck the US government didn't get its hands on.
Thus a capital-gains tax cut would be some 20 times as efficient as the personal tax reductions the administration is proposing. Kemp- Roth, however, would have a much greater absolute effect, adding $42.7 billion to the GNP by 1983. The two targeted proposals, applied on a smaller scale than Kemp-Roth, would tack on only $12.4 billion in the same time period.
In other words, the two proposals are graceful and accurate, but Kemp-Roth has a lot more brute force.
"Directed business tax incentives are really essential," says Allen Sinai, director of financial services at Data Resources.
The Kemp-Roth cut would dump a lot of dollars in the hands of consumers. Many Wall Street analysts think a surge of inflationary spending would be the result.
While not disavowing Kemp-Roth, Mr. Sinai said it could add 1 to 2 percent to the inflation rate by 1985. "You certainly can't bill it as a weapon to fight inflation," he said, indicating that his own personal preference would be for a 5 percent cut in each of the next three years.
"Reagan clearly shows a good understanding of what's needed to form capital in this country," says Edward O'Brien, president of SIA, saying his association believes personal tax cuts are needed "because otherwise individuals will be pushed into higher brackets."
But when asked if Kemp-Roth went too far, too fast, O'Brien admitted "that's a difficult question." He said it would be worthwhile for the administration to consider spreading the cut over two years, instead of three.
The SIA, an important player on Wall Street, isn't thrilled about the direct effect Kemp-Roth would have on the economy. But it believes its passage would be justice for the individual taxpayer, according to Ball -- and it signifies a governmental attitude toward taxation in general that it likes.