Economists from three prominent forecasting firms warned yesterday that the sweeping tax-revision bill passed by the House would raise the cost of business investment and thus make U.S. exports more expensive.
Under questioning from Senate Finance Committee Chairman Bob Packwood (R-Ore.), the economists agreed it would be better for the economy to shift less of the tax burden from individuals to business, paying for preserving some business tax breaks with a new consumption tax.
The hearing, the first held on the House measure since it was approved last December, also gave members of the Finance panel a chance to criticize it before writing their own tax package, probably in March.
Many senators of both parties agreed with the economists that the bill would harm the U.S. trade position and slow down investment.
"This may be a wonderful tax bill for Japan and the Common Market and our other competitors, but it worries me about what it's going to do for the United States," said Sen. David L. Boren (D-Okla.). "Maybe we could get Japan to pass a similar tax bill to raise their own cost of capital."
Several criticized it for curtailing tax benefits to particular industries such as oil and gas and for placing new limits on tax-exempt bonds. Only two panel members -- Sens. George J. Mitchell (D-Maine) and Bill Bradley (D-N.J.) -- spoke in support of the legislation.
Committee members have voted against using the House bill as a starting point for their deliberations. Instead, Packwood will try to put together a working draft in conjunction with the committee's ranking Democrat, Sen. Russell B. Long (La.).
More economists will testify on the House bill today and next week. Later in the month, a Finance subcommittee headed by Sen. Malcolm Wallop (R-Wyo.) will hold hearings on an oil-import fee. Wallop is cosponsoring legislation with Sen. Lloyd Bentsen (D-Tex.) to impose a fee on imported oil that would take effect if the per-barrel price fell below a certain level, as yet unspecified.
Lawrence Chimerine, chairman of Chase Econometrics, said that President Reagan's tax plan and the House bill would have a "significantly depressing effect on the economy in the first year, because of some extremely nasty transition effects." In later years, growth would resume and, in five years, gross national product would be at the level it would have reached if the tax system were not changed, Chimerine said.
"There is no evidence to support the conclusion we will get much more rapid growth if tax reform is enacted," Chimerine said.
Roger E. Brinner, chief economist for Data Resources Inc., said the House bill would "enhance the fairness of the tax code and slightly reduce the government's role in decision making, but . . . would produce a significant loss in the nation's long-run growth prospects." Unlike Chimerine, he predicted that higher consumer spending would prop up the economy in the short term, but that long-term growth would be impaired.
George R. Schink, vice president of Wharton Econometrics, predicted higher GNP for the first five years, but said then growth would be slower than otherwise. A slump in investment spending would cause the decline, he said.
The mathematical models used by all three economists, while intended to be detailed representations of the actual economy, cannot accurately capture the effects of tax reform, proponents of tax overhaul argue. In particular, the models cannot show possible incentive effects of lower tax rates, or the benefits that might result from taxing investments in different industries more equally, they say.
Chimerine contends the bill would bring in less revenue than the current tax system because it curtails relatively few tax shelters. Brinner and Schink disagree, saying it would be a net revenue-raiser in the long run because the business-tax increases would bring in more money than anticipated.
All three economists proposed that the Finance Committee write a bill with a smaller shift of the tax burden to business than the $140 billion transfer the House measure would bring about over five years. They said deficit reduction is more important to the economy's health than revising the tax code.