Supply-siders watch theory fall from favor

Ardent believers in supply-side economics, some of whom once served in the Reagan administration, no longer count the President as one of their own.

Many supply-siders felt last year's tax cuts weren't big enough. Now, with President Reagan backing a $98.3 billion revenue increase bill, they feel their loosely defined discipline has little influence on White House economic policy.

''(Reaganomics) really has almost nothing to do with supply-side economics,'' says Steven Hanke, a supply-sider who recently resigned as senior economist for the President's Council of Economic Advisers.

''The term is so amorphous and elusive,'' says -David Raboy, director of the Institute for Research on the Economics of Taxation, and editor of a book on supply-side economics.

In general, supply-side's primary tenet is that high tax rates reduce the incentive to work, invest, and save. Slash taxes, say supply-siders, and the result will be increased economic activity.

The supply-side fringe, represented by economist Arthur Laffer and his famous ''Laffer Curve,'' says the business boom would be strong enough to quickly recover lost tax revenue. Most supply-side proponents say the reaction would be more modest, and disavow Mr. Laffer as someone who's done the discipline as much harm as good.

Last year, the administration promoted its big tax cut package as just the ticket to provide supply-side economic incentives.

But many supply-side believers say the centerpiece of the package -- personal income-tax cuts totaling 25 percent over three years -- isn't big enough. They say scheduled social security tax increases and inflation-caused bracket creep will swamp any supply-side effect from the tax cuts.

''I would argue they didn't go far enough with the personal cuts,'' says Mr. Hanke, now a professor at Johns Hopkins University.

The personal tax cuts will save taxpayers about $330 billion between 1983 and 1985. Hanke estimates inflation and social security hikes will total $238 billion for the period.

Tack on the tax hike now being pushed by the President, says Hanke, and the personal cuts disappear. He also claims the revenue increase bill would wipe out half the business tax cuts passed last year.

Administration officials disagree with Hanke's bleak prognosis for economic incentives. Budget Director David Stockman, at a breakfast with reporters Aug. 17, said the revenue bill now being considered in Congress ''preserves 70 percent of last year's business-oriented reforms.''

The third year of the personal tax cut was preserved, stressed Mr. Stockman. In last year's bill, the top marginal rate (the rate charged on a taxpayer's last dollar of income) has been reduced from 70 to 50 percent, said the budget director. The capital gains tax, he pointed out, was lowered to 20 percent.

When the recession abates ''these incentives will kick in,'' insisted Stockman.

But to supply-siders any kind of tax increase is an anathema.

''The President does not understand how much this bill cuts into his program, '' says Paul Craig Roberts, former Treasury official.

Mr. Roberts is concerned that the revenue increases currently under consideration are only the first step. Now that the administration has shown it is willing to close the deficit with new taxes, says Roberts, further spending cuts will be more difficult. Pressure for yet another round of tax increases will grow.

''These tax increases have the potential of being a Trojan horse, leading to further revenue hikes. . .,'' he says.

And by embracing tax increases, claim supply-siders, Reagan has abandoned hope of reaching a primary goal of his presidency: a reduction in size of the federal government.

Admittedly optimistic figures from the administration's midyear budget review predict that government spending's share of gross national product (GNP) will decline from 24.1 percent in 1982 to 21.2 percent in 1985.

But supply-siders point to a recent Federal Reserve Bank of New York analysis , which estimated federal spending will still be 23.8 percent of GNP in 1985.

''Congress does not seem to have the will to control spending,'' says Richard Rahn, chief economist of the US Chamber of Commerce and an ardent supply-sider.

Frustrated supply-siders are working hard to defeat the tax bill now under consideration. The US Chamber of Commerce, led by Dr. Rahn and president Richard Lesher, is covering Capitol Hill with lobbyists. Rep. Jack Kemp (R) of New York, the most visible congressional supply-side proponent, is leading the fight from inside the legislature.

They have few ideological allies within the administration. Norman Ture, undersecretary of the Treasury for tax and economic affairs and an original supply-sider, resigned early this summer, shortly after the departures of Hanke and Roberts.

Manuel Johnson, Robert's successor, is the only high-ranking supply-sider left.