Economists Agree Plan Would Lead to Faster Growth

Leading private economists generally agreed Wednesday that the Reagan Administration’s latest tax reform proposal would deliver what the President promised when he unveiled it Tuesday: faster economic growth, a fairer spreading of the tax burden and simpler arithmetic for befuddled taxpayers.

The key word, however, is generally, for, although experts gave the Reagan plan high marks compared to the current 10,000-page federal tax code, they were united on little else.

“It’s good enough to be worth fighting to improve and good enough so that, if you can’t improve it, you vote for it anyway,” Henry Aaron, a tax expert with the Brookings Institution in Washington, said in a typical assessment. “But the President’s given away a lot.”

What Aaron views as “giveaways”--changes in the Reagan proposal from the original tax reform plan proposed by the Treasury Department last November--are either clear improvements or concessions to special interests, depending on economists’ often-conflicting views.

Plan ‘Revenue Neutral’

Administration analysts contended that the Reagan plan would spur a 1.5% increase in the gross national product, adjusted for inflation, by 1995. They said also that the plan is “revenue neutral”--that is, it would raise the same amount of tax money as the current system, but more fairly.

Most experts agreed with the prediction of at least some GNP growth, even though the Reagan plan would raise the corporate tax burden by $120 billion in the next five years and repeal some policies, such as the investment tax credit, that have lowered the cost of capital investment.

Increased consumer spending, resulting from personal income tax reductions, and a lower maximum tax on businesses--33% versus 46%--should more than make up for the higher corporate share of the tax load, many experts said.

Consumer Spending

“The central question is whether consumers will spend enough additional money to offset the higher corporate taxes,” said David Ernst, a forecaster with Evans Economics in Washington. “And I happen to think that, looking over a period of several years, this move will increase growth in the U.S.”

Forecasters at Data Resources Inc., a leading economic consulting firm in Lexington, Mass., predicted that the Reagan proposal would result in higher growth rates than the Treasury plan, largely because the Reagan plan taxes businesses less than the Treasury would.

But other economists complained that Reagan’s plan preserves more unproductive tax dodges--and promises more limited economic growth--than the Treasury’s. “It’s hard to predict growth rates, because they’ve given away a number of efficiency improvements in this proposal that Treasury contained,” Aaron said.

He and others cited the Reagan plan’s preservation of most of the tax breaks for the oil industry and provisions partly maintaining tax shelters as the worst aspects of the proposal. Like the present tax code, they contend, such policies divert investors’ money from entrepreneurial ventures to less productive havens.

Most--but not all--experts agreed with the Administration view that the Reagan plan is revenue neutral. Aaron said that the proposal, if enacted, would be likely to cause a brief dip in tax revenues, followed by a long-term gain due to economic growth.

Spurt in Revenue Seen

Alan Reynolds, a forecaster with Polyconomics Inc., a New Jersey consulting firm, predicted that the plan would generate a brief spurt in tax revenues “greater than Treasury’s wildest dreams.”

Similar cuts in personal income tax rates--in 1954, 1964, 1970 and 1983--led to later surges in tax revenues, he noted. And the proposed lowering of marginal tax rates is so sharp, he said, that it could lead white-collar workers to invest less in tax-sheltered investments such as individual retirement accounts and unions to trade long-term employee benefits for more up-front cash in paychecks.

The same lowering of marginal rates would also reduce the incentive to cheat on taxes, producing still more revenue for the Treasury, he said.

Economists generally said that the proposed changes would make filing a return simpler for average taxpayers. But “the business tax system certainly isn’t simplified under this system,” said Rachelle Bernstein, tax policy manager for the Chamber of Commerce of the United States. “I don’t have to read the entire book to determine whether that’s true.”

Bernstein and Alexander Trowbridge, president of the National Assn. of Manufacturers, both expressed concern that the President’s plan will eliminate too many incentives for investment, potentially placing American businesses at a disadvantage against foreign competitors.

Like the Treasury proposal, the Reagan plan hits hardest at tax benefits that have helped heavy industries, such as steel and machine tools, that face the stiffest import challenges.