Sticking to the supply side; Why White House rejected tax hikes

By ruling out tax increases this year President Reagan thrusts himself out on a lonely limb, where most of his own advisers hesitate to follow.

The President clings to his cherished supply-side theory. In the long run, he holds, huge tax cuts will stimulate the economy into prosperity and growth.

Meanwhile, he says, ''Our forecasts . . . will show major deficits, starting at less than $100 billion and declining, but still too high.''

This estimate conflicts with other forecasts from inside and outside his administration that the 1982 budget shortfall could top $100 billion, with higher deficits to follow.

Experts now look to financial markets to see how investors will assess Mr. Reagan's assertion that, without tax increases, deficits will remain under $100 billion and go down.

''How much has Wall Street already taken into account a bad 1983 budget?'' asked a prominent Republican economist.

''If we get phony assumptions (from the White House) -- a $100 billion deficit in 1982, $80 billion in '83, $55 billion in 1984 -- and if investors have not already taken into account what really may happen, then interest rates should shoot up.''

Major money managers, in this expert's view, may reject Reagan's optimistic forecast on budget deficits and, to protect themselves against future losses, raise interest rates. To offset such a reaction, Reagan calls on the American people to ''seize these new opportunities to produce, save,and invest, and together we will make this economy a mighty engine of freedom, hope, and prosperity again.''

At a time when many family pocketbooks are stripped bare, millions of Americans may not save or invest their tax savings, critics say, but rather spend them on deferred purchases.

Having rejected tax increases, the President says ''we must cut out more nonessential government spending and root out more waste.'' This appears to herald further cuts in social programs in the upcoming fiscal 1983 budget, which Reagan will send to Congress Feb. 8. Programs affecting the poor, according to congressional estimates, absorbed roughly $25 billion of the $35 billion trimmed from the 1982 budget.

A lively debate is expected to erupt in Congress over the 1983 budget, with many members balking at taking more money from disadvantaged Americans and giving extra funds to the Pentagon. The President, citing ''a strong national defense'' as one of his highest budget priorities, reportedly will seek to boost military outlays by 7 percent in real terms in fiscal 1983, as he did in 1982.

When Reagan began his term a year ago, he was surrounded by supply-side advocates -- some dedicated, others paying lip service to an economic theory that was largely untried. As the year went on, his advisers began to have doubts -- most spectacularly Budget Director David A. Stockman. They began to argue that without tax increases, deficits would slip out of control.

Their best arguments failed to sway the President. As one observer explained it, the President ''paid more attention to the US Chamber of Commerce than to his own advisers.''

Just before the State of the Union address, a US Chamber delegation visited Reagan and opposed the imposition of new excise taxes on tobacco, liquor, and gasoline. After days of having seesawed pro and con, Reagan accepted the Chamber view and rejected that of his own aides.

If the economy now fails to respond as the President hopes, he appears to have two scapegoats to blame -- Wall Street for lack of confidence and the Federal Reserve Board for ''erratic'' management of the money supply.

Treasury Secretary Donald T. Regan, testifying before the Joint Economic Committee of Congress hours after the State of the Union address, blamed the Fed for helping to cause the recession. Mr. Regan accused the Federal Reserve Board of tightening the monetary screws when they should have been loosened and loosening when they should have been tightened. Supply-side economic growth, said the Treasury chief, not higher taxes, would cut deficits. This echoed the line expressed by Reagan the night before.

Although he held out longest among Reagan aides against higher taxes, Regan, too, reportedly urged some tax boosts to trim deficits. Presidential advisers now face the necessity of supporting and explaining a presidential decision on taxes with which many of them presumably disagree, on the basis of what they advised Reagan.

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