The Treasury Department's tax simplification plan would increase economic growth slightly and improve the efficiency of the economy, three economists told a congressional subcommittee yesterday.
In something of a change of position, a representative of Wharton Econometrics agreed with two academics that the proposal could result in lower interest rates and would reduce economic distortions caused by the tax code.
Wharton, Data Resources Inc. and several business trade associations predicted when the simplification proposal was first released last November that it would encourage consumption at the expense of investment.
Wharton said, in a study released in December, that the plan would "lower capital accumulation and, ultimately, productivity."
But yesterday, Nariman Behravesh, vice president for U.S. services, said the long-term growth rate of the gross national product would be altered very little by the Treasury proposal.
"The plan can be viewed as being neither anti-growth nor pro-growth. Instead, it addresses some of the distributional imbalances of the current tax code," Behravesh said.
He was speaking before the economic stabilization subcommittee of the House Banking Committee.
The more encouraging view that Behravesh expressed at the hearing seemed to be part of what some observers have called a "second wave," in which some professional forecasters and corporate interests are reassessing their initial opinions about the economic effects of the Treasury plan.
Like congressionally sponsored simplification measures, that plan -- now undergoing a rewrite by Treasury Secretary James A. Baker III -- would reduce individual and corporate rates while doing away with many deductions and credits.
Two other tax economists, both academics, said they strongly supported the proposal.
Don Fullerton of the University of Virginia said its passage could raise the value of national output by 1 percent per year, the equivalent of a one-time "gift" to the total stock of wealth in the nation of about $400 billion.
This gain comes principally from eliminating widely differing tax rates between industries.
Taxing corporate income and corporate dividends, coupled with variations in investment financing methods, property tax rates and other factors, can result in effective tax rates ranging from 110 percent of the cost of the investment to a negative rate of 105 percent -- which amounts to a subsidy, Fullerton said.
"The corporate tax system subsidizes a substantial amount of investment in this country, with a considerable revenue cost," according to Fullerton.
Alan J. Auerbach of the University of Pennsylvania suggested that the investment tax credit, which effectively pays for up to 10 percent of the cost of investment in equipment, is responsible for a large portion of the distortions in the code. And he said economists as a group are less divided about the impact of tax simplification than they have publicly appeared to be.
"Disagreements about what the plan would do are small compared to disagreements involving interests with concern about particular provisions of this tax code," he said.