Bronx Cheer Given To GOP Tax Cuts

But House Republicans predict greater prosperity

THE Republicans in the House of Representatives claim major benefits for their program of budget cuts and tax relief. But some economists find those claims troubling.

''If the tax proposals are passed, the result will be either higher inflation or higher interest rates,'' says Daniel Bachman, senior economist with the WEFA Group, a Philadelphia-based economic forecasting firm. ''There will be a lot more demand for goods and services than there will be the capacity to produce them, because we're already close to operating at our full capacity to produce.''

In recent days, the GOP lawmakers have brought tens of billions of itemized spending cuts to the table -- part of their strategy to eliminate the deficit by the year 2002. And, they're anxious to deliver tax cuts to American taxpayers.

Top on the GOP agenda is a push for a $500 tax credit for each child younger than 18, a 50 percent reduction in the tax on capital gains from selling assets such as real estate or securities, and expanded tax breaks for individual retirement accounts.

Indeed, those scripting the GOP tax bill say their efforts will stimulate investment, add to wealth, and create a more robust economy. The child tax rebate will put more money in family coffers for spending or saving, they say; halving the tax on capital gains will provide investors and businesses with more money to expand their operations and create jobs; and allowing taxpayers to sock away more tax-free savings will increase the pool of investment capital.

Mr. Bachman says, however, that even if there is a lot more money poured into new factories, new machinery, and production, demand will still outpace capacity to produce. ''That's a recipe for inflation, and the Federal Reserve ... would react strongly by raising interest rates.''

Lawmakers' attempts to tinker with the economy over the years have been overshadowed by the nation's central bank. Members of Congress most active in economic policy concede with some frustration that the Fed controls short-term interest rates and the money supply, factors crucial to the level of business activity.

Most Fed watchers assume that Fed Chairman Alan Greenspan will stick the same fundamental goals regardless of Congressional tax or budget cuts. ''He will continue to target inflation and the unemployment rate,'' says Prof. Allan Meltzer, an economist at Carnegie-Mellon's University's Graduate School of Industrial Administration and chairman of the Shadow Open Market Committee, a group of academic and business economists who study Fed policy.

The $500 tax cut ''does nothing to get people to save more, invest more, and make the economy grow faster,'' says Dr. Meltzer. He would like to see government measures to encourage ''capital formation,'' but ''it should be done directly, by cutting corporate income taxes, not by a cutting the capital gains tax.''

Kevin Phillips, a Washington political analyst, objects to the ''whole notion of $700 billion of tax cuts over 10 years, while the big blow out -- the costs are $200 billion for the first five-year phase and $500 billion for the second five-year phase -- comes later when the Republicans escape scrutiny.''

''Screaming fiscal crisis and then cutting taxes for investors and business'' is a duality that Mr. Phillips finds uncomfortable. He predicts it will soon make GOP leaders equally unsettled.

''There will be a downturn in the economy,'' says Phillips, referring to the consensus forecast of the country's leading economists that United States economic growth will drop markedly this year, and dip further in 1996.

The GOP's Democratic detractors have called the tax proposals an effort to fill consumers' pocketbooks by the time voters go to the polls next year.

Meltzer sees it as ''a promise made to voters to give them a tax cut. Economically, it's a non-starter.''

The Republicans on Capitol Hill were this week showcasing Michigan's budget-slashing, tax-cutting Gov. John Engler as a politician who has reaped economic success partly through fiscal stringency. Facing a huge budget deficit on entering office, Governor Engler spent the past five years cutting splending, eliminating government waste. He has has put Michigan's budget into a surplus position and saved enough to lower taxes 11 times.

''Economics ought to drive much of this [1996] campaign,'' he told a Monitor breakfast. He says tax cuts, incentives for entrepreneurs, and other measures have worked in his state. ''We've really led the recovery in the country,'' Engler says.

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