The assertion that the Reagan administration's proposed tax reductions will cut inflation in half by 1383 is a "fairly tale," Gardner Ackley, an economic adviser to presidents Kennedy and Johnson, said yesterday.
Ackley was one of four economists testifying before the tax-writing House Ways and Means Committee yesterday. He told the panel that it would "truly be a miracle" if the economy grows as rapidly as the administration has forecast and if inflation declines as it has predicted.
An opposing view of the likely effect of the administration's proposals came from Arthur Laffer, who inspired the president's proposed 30 percent cut in personal tax rates with his argument that lowering tax rates would spur the economy enough to raise tax revenues. While he agreed that tax cuts by themselves would not reduce inflation, Laffer said the president's economic plan is "excellent" as the first step on the road.
Ackley and Joseph Pechman of the Brookings Institution told committee members that a tax cut of the size suggested by the president probably would be inflationary. "It would be a highly inflationary move" to cut taxes irrespective of what was happening to spending, Pechman said, adding, "don't take his [Laffer's] advice" to go ahead with the tax cut as soon as possible.
The other economist before the committee, John Rutledge of the Claremont Economics Institute, claimed that the tax cuts are small and said that he can see "not a nickel" of monetary or fiscal stimulus in the president's packatge.
Rutledge and Laffer are both "supply siders" close to the administration. Rutledge produced some controversial and reportedly very optimistic forecasts of the economy for the Office of Management and Budget last month. These were shot down by others in the administration.
Both he and Laffer said they think Congress should go further in cutting taxes to stimulate the economy. They said this would help savings and investment in the economy. Ruthledge said the Reagan package would increase the work force by 1 million after four years, generate about $60 billion in new capital formation and raise the average person's income by about $600 by 1984.
Pechman disagreed sharply with the supply-side assertion that tax cuts would give a big boost to productivity or that rate cuts could pay for themselves. "Tax cuts will not pay for themselves ever," he told the committee.
Except for Ackley, the economists yesterday supported the business side of the proposed tax cut. Ways and Means Chairman Dan Rostnkowski (D-Ill.) said yesterday that bipartisan agreement is near on backdating the business tax cut.
All of the economists agreed that budget deficits are not a major, or direct, cause of inflation. But whereas Pechman was concerned about the impact on inflation of wage and price settlements, Laffer and Rutledge maintained that money growth is the cause of inflation.
There was also agreement that it would be a good idea to abolish some "tax expenditures" or special tax deductions and credits such as tax-exempt industrial development bonds. Pechman told the committee that $15 billion to $20 billion could be saved by getting rid of some tax expenditures, including tax deductions for interest payments. Laffer opposed ending the interest subsidy, but agreed that if other taxes were being cut, then raising revenues through slimming tax expenditures, thus closing some tax loopholes, would be a good idea.The administration has opposed this so far.
Ways and Means members have expressed considerable doubts about the economic assumptions underlying Reagan's proposals, and they are particularly wary of the three-year cut in personal tax rates.