Treasury Secretary Donald Regan told a Chamber of Commerce breakfast the other day that "the president simply will not agree to anything less than a 25 percent, three-year schedule of tax reduction . . . His real, deep-down meaning is he wants a 25 percent, three-year tax cut."
Well, as the president might say, that sounds as if the secretary knows what he's talking about. And I'm sure that Secretary Regan -- now much more sure of himself than he was in the first weeks of the administration -- is selling the current White House line.
But the only trouble with taking Secretary Regan too seriously is that not so long ago, President Reagan's position was that he wanted a full 30 percent, three-year tax cut, as detailed in the Kemp-Roth bill, with the first stage effective on July 1, 1981.
When faced, however, with mounting skepticism from Republican conservatives in the Senate about a box-car sized Federal deficit in fiscal 1982, as well as somewhat panicky stock and bond markets, the president sensibly trimmed the first-stage 10 percent to 5 percent, and postponed the starting time by three months to Oct. 1 -- that is to say, until the beginning of fiscal 1982.
This is a bigger change than meets the eye. The combination of the rate reduction and the three-month delay means that the effective rate reduction in this calendar year would be only 1 1/4 percent instead of 5 percent, and in calendar 1982 only 10 percent, instead of a total of 15 percent. By calendar 1983, the cumulative cut under the president's current proposal would be 20 percent, not hitting 25 percent until calendar 1984.
The effect of this presidential concession in trimming the personal tax reductions -- which the administration has been careful not to publicize in this fashion -- amounts to: totally wiping out $6.4 billion in personal tax cuts in fiscal 1981, reducing the cuts by $17 billion in fiscal 1982, and by $7 billion in fiscal 1983, compared with the original Kemp-Roth proposal. Result: the federal deficit is trimmed by approximately the same amounts in those three fiscal years.
Having made these sensible concessions to the real world, it will take something more than Don Regan swearing on a stack of Bibles to convince a skeptic that there may not be further changes down the road. At the moment the administration sets great store by that third year of tax-cutting. The multiyear approach is one of the canons of supply-side ideology. But there are many Republicans as well as Democrats on Capitol Hill, not swept away by theory, who would rather know what economic conditions actually are going to be before committing the nation to a third 10 percent tax cut slice.
"This issue of one versus two versus three years," Regan told the chamber, "should be of great importance to every businessman and woman. Its importance can best be summed up with one word: predictability. Who can make adequate plans if we can't count on the second and third stages of the tax cut? What good is a 'maybe' tax reduction?"
But suppose a determined Democratic House opposition in conference yields the principle of a third year cut to Reagan but forces a reduction to 5 percent for the third year. That would produce a 20 percent, three-year cut -- 5, 10 and 5. Would the president veto such a bill?
There are knowledgeable people in this town who think that the president would sign such a bill. It would be yet another concession, but would give for his economic proposals. He would have achieved practically everything he tried to get on the budget-reduction side, and most of what he set out to do on the tax side -- a tilt of the tax system to benefit the upper-middle class and the wealthy.
It would give Reagan not only most of the personal tax cut he now demands, plus super-generous business tax deductions, as well as a grab-bag of other tax goodies that he hadn't asked for at the start. Notably, these include the dramatic reduction from 70 percent to 50 percent in the top rate on "unearned income", foisted on him by the Democrats. The irony there is that Reagan's supply-siders wanted the president to recommend that slash as part of the initial tax package, but the president's political advisers touted him off it, fearing a "rich party" label.
Financial markets, here and abroad, still view Reagan's projected program with concern over its inflationary impact. Only the most committed supply-siders think that a program of exceedingly generous tax cuts, coupled with the big boost that lies ahead in military spending, will not be inflationary. Larry Chimerine of Chase Econometrics notes, in addition, that Reagan's projections of the cost of defense goods "appear to be significantly on the low side."
The opposition to Reagan's proposed Social Security cuts shows how difficult it will be to come up with the additional $30 billion to $40 billion in budget cuts that the president needs to achieve his theoretical budget balance some time in 1984. All of this suggests that when push comes to shove, Reagan might be wise to give up a little bit more of the tax package.