Treasury Secretary Donald T. Regan makes no bones about why the administration is backing away from the strict supply-side theories that had been the hallmark of President Reagan's economic program.
''It's great to have a good theory,'' Mr. Regan told reporters at breakfast. ''But when that theory comes up against perception, something has to be done.''
His 35 years on Wall Street, said the Treasury chief, had shown him that the perception of money men ''is contrary to supply-side convictions.''
Experts who handle their own and other people's money simply do not believe the supply-side argument that huge income tax cuts -- simultaneous with growing government outlays for defense and social security - will lead to a balanced budget. Lenders and investors foresaw instead what in fact is happening -- budget deficits leaping into the stratosphere, putting upward pressure on future interest rates.
Regan, who once scoffed at predictions that any yearly deficit would climb above $100 billion, now says that without passage of the tax increase bill before Congress, next year's shortfall could hit $180 billion to $200 billion.
House and Senate conferees have completed work on the controversial $98.3 billion tax bill, designed to whittle away at government deficits over the next three years. Also included in the budget package, which now goes to the full House and Senate for final consideration, is $15 billion in spending cuts.
Through higher taxes on telephone use and on cigarettes, the measure to some extent hits lower income Americans. The bulk of the tax increases, however, come from closing loopholes enjoyed both by wealthy individuals and corporations.
''The financial markets,'' said Regan in reference to looming budget deficits , ''cannot stand the Treasury going in for $180-to-$200 billion in new borrowings, plus the rollover of the existing $1 trillion debt.''
Government borrowing on that scale, most analysts believe, would pump up interest rates, choking off whatever economic recovery might get underway later this year.
Currently interest rates are on their way down, with major banks dropping the prime rate -- the interest rate charged to their best corporate customers -- to 14 1/2 percent from 15 percent.
Ardent supply-siders are up in arms over the President's endorsement of the tax increase bill, charging Mr. Reagan with abandoning his principles.
Commenting on that charge, voiced among others by Rep. Jack Kemp (R) of New York and by two of Mr. Regan's former high Treasury aides, the Treasury chief said: ''It's fine to stand on a philosophy. But we cannot revive the economy without lower interest rates. That will not occur until deficits come down. So we have endorsed this tax increase bill.''
The recession of 1981-82, says Regan, ''was much deeper than had been anticipated,'' at least by the administration. ''This cost the Treasury a great deal of revenue.''
A 1 percent rise in unemployment increases the budget deficit by about $25 billion, because of lost tax revenues and higher jobless benefit outlays. Since July 1981, the unemployment rate has climbed more than 2.5 percentage points.
Inflation, said Mr. Regan, has gone down more rapidly than had been expected -- ''from 12.5 percent in 1980 to under 9 percent in 1981 and 5 percent so far this year.''
From the national standpoint, this is good news -- the goal towards which successive administrations have striven for years. For the US Treasury, however, the good news has a sting. Fewer people are pushed by inflation into higher tax brackets, which means smaller tax collections by the Treasury.
Clearly Reagan has a sticking point beyond which he does not intend to slide from his original policies. He insists income taxes will drop again on July 1, 1983, completing the final stage of his three-year tax cut program.
''Those income tax cuts, '' says Regan, ''were the heart and soul of Reagan's program.''
Many private economists, as well as Democrats in Congress, contend that elimination of the third-year tax cut would provide a clear signal to Wall Street that the government intends to put a lid on deficits.
Mr. Reagan see it otherwise. He digs in his heels against this final erosion of Reaganomics.