Time for a coherent Reagan economic policy
THE more we learn about the Reagan income tax reform program, with its combination of lower brackets and reduced or eliminated deductions, the more cause there is for concern. Treasury Department blue-printers seem to have lacked broad perspective, both political and economic. Alas, this is a recurrent problem in the administration, arguably reflecting free-market distaste for a coordinated government approach to the economy.
A degree of political naivete was inevitable, of course. Consulting professors and economists cannot be expected to know the ABC's of national constituencies and Washington lobbies. What's more damning is the lack of economic realism.
For example, the corporate component of the Treasury's proposal involves a fundamental reversal of the Reagan administration's original tax plan, enacted in 1981, to liberalize business depreciation in order to encourage business investment. The changes themselves are discussable. It's the poor timing that's so striking. Whatever their substantive merits in another context, the proposed reduction of depreciation benefits, elimination of the investment tax credit, and elimination of special treatment for capital gains seem counterproductive when corporate profits are flagging and a recession may lie just over the horizon. Nor do such measures seem wise when many of the basic-industry and high-tech companies most injured by the proposed tax changes are already reeling from foreign competition indirectly subsidized by other aspects of US policy (notably the highly valued dollar, which makes imports so cheap). Commerce Secretary Malcolm Baldrige openly expresses concern that elimination of the accelerated depreciation provisions of the tax code would worsen American industry's ability to compete with foreign companies. ''I think we have to look at that very carefully, very cautiously,'' he told reporters in early December.
Second, leaks from the Treasury indicate that although the architects of the tax reform proposal, Secretary Donald Regan included, knew they would offend basic industry, they believed high-tech would be pleased by reduction of corporate income tax brackets. What they failed to realize, however, was that their simultaneous proposal to eliminate special tax treatment of capital gains - a reversal tantamount to increasing the cost of capital - would offend high-tech entrepreneurialism. Industry reaction has ranged from lukewarm to angry. Chalk up another myopia.
Third, outside economists are beginning to advise that the Treasury tax proposal would reduce, not bolster, US economic growth in the late 1980s. To an extent, they are substantiating business lobby arguments. New analyses by Data Resources International (DRI) and Chase Econometrics - the former a comprehensive overview of the sort never done by Treasury experts - agree that growth would be slowed. Similarly, an earlier dissection of modified flat tax proposals, published in November by the St. Louis-based Center for the Study of American Business, concluded that elimination of the business growth incentives would add another point or point-and-a-half to the US unemployment rate by 1989. If so, then using the usual unemployment change and budget impact correlations, such reduced growth would add $25 billion to $40 billion a year to the federal deficit. New tax-increase pressures would grow accordingly.
Finally, in addition to business investment, capital formation and job formation, housing, too, would be undercut by the Treasury proposal. Because of the new restrictions and limits the Regan blueprint would apply to mortgage interest deductibility, DRI's initial estimate is that the average home price in the US could drop 12 percent. Such a decline would play havoc with the distribution of US prosperity. The rich would be minimally affected, but the middle and upper middle classes would be devastated. According to a study released just this month by the Federal Reserve Board, home ownership equity accounts for 63 percent of the net worth of the average American family. A 12 percent fall in home prices could wipe out a huge chunk of American wealth.
I'm tempted to conclude that any program so naive could only have been put together in a strategic vacuum. Enactment in its present form could be an economic disaster. So the more quickly and fully these weaknesses can be underscored, the sooner the administration can be pushed toward two realities: not just the wisdom of scotching the Treasury's maladroit tax blueprint, but the larger need for a comprehensive, strategic approach to domestic and international economic policymaking.
Kevin Phillips, commentator and political analyst, is the author of ''Staying on Top: The Business Case for a National Industrial Strategy.''
