The Carter administration launched a sharp attack yesterday against the massive tax cuts being proposed by the Republicans, an indication the White House is worried the Kemp-Roth proposal may be catching on in Congress.
Charles Schultze, chairman of the President's Council of Economic Advisers, said the proposed 30 percent tax cut, phased in over three years, would produce a "very overheated economy and an increase in the rate of inflation that could be enormous." Schultze made his prediction in testimony before the House Budget Committee.
The Republican measure, proposed by Rep. Jack Kemp (R-N.Y.) and Sen. William Roth (R-Del.), would cut taxes by about $30 billion next year, and then increase to between $110 and $120 billion by 1981.
Congressional Republicans launched a major election campaign this week based on the appeal of the Kemp-Roth tax cuts.
Schultze said the massive tax cut would increase buying power far faster than the economy could increase production. "Committing the federal government now to a tax cut of such dimensions is, I submit, a sure-fire recipe for inflation," he told the budget committee.
Treasury Secretary W. Michael Blumenthal, testifying later, also opposed Kemp-Roth as inflationary but sounded a conciliatory note on the administration's strong opposition to a cut in the tax on capital gains, which is gaining increasing popularity in the House.
Blumenthal noted that while President Carter has theatened to veto proposals now being considered by the House Ways and Means Committee, "It is significant" that the President has not said he would veto any change in capital gains taxes. Capital gains are profits from the sale of assets such as homes or stocks.
One proposal, authored by Rep. William Steiger (R-Wis.), would cut capital gains taxes from 50 percent to 25 percent, and would result in a -2.4 billion revenue loss to the Treasury. A compromise worked out by Rep. James Jones (DOkla.', would reduce capital gains taxes by $1 billion.
The Jones proposal essentially replaces the $20 billion Carter admininstration tax cut and "reform" proposal and replaces it with a $15 billion bill containing tax cuts for middle income families and small businesses.
In response to a question from committee chairman Robert Giaimo (D-Conn.', Blumenthal said the administration would not have its own alternative capital gains plan.
But Blumenthal said he would be receptive to proposals that cut capital gains taxes less than either the Steiger or Jones proposals, provided it did not give most of the benefits to people with high incomes. Blumenthal said the capital gains tax cuts would do nothing to stimulate business investment, a goal of the President's tax plan.
Blumenthal said that while the Carter administration "does not have and will not have" its own capital gains plan, it is clear that Congress wants to pass some form of capital gains tax reduction. If one was proposed that treated tax payers equitably and did not cost the Treasury too much money, Blumenthal said he would recommend it to the President.
He could not say whether the President would accept his recommendation.
Both Blumenthal and Schultze said that some tax cut is needed in 1979 to compensate for higher Social Security tax increases, proposed energy taxes and inflation.
Schultze, in criticizing the Kemp-Roth proposal, said the question is not over whether, but how big, the tax cut should be in 1979 and whether one will be needed in 1980 and 1981. Schultze said he thinks further tax reductions will be needed in future years, but not of the size proposed by Kemp-Roth.