Following a splendid series of appointments at the Treasury and the Office of Management and Budget, President Reagan's Thursday evening address signified a resounding triumph for supply-side theorists in his administration. As the cautionary tale of Margaret Thatcher's British regime will suggest, however, supply-side theory and monetary restraint can be easier to pronounce than apply.
Thatcher failed to combine her reductin in basic monetary growth rates with a reduction in government taxing and spending. But without spending cuts, tight money merely chokes the private sector. In 1980 and 1981, British manufacturing output is expected to drop by a total of 20 percent, while the obsolescent, inefficient and overmanned British public sector industries absorbed billions of pounds of scarce capital beyond their previously bodgeted borrowing levels. Dramatically increasing the need for these bail-outs is the very recession that is at least partly attributable to Thatcher's failure to cut taxes and government spending when she restricted monetary growth.
Now President Reagan has made a seemingly similar commitment to cut tax rates and government spending and to fight inflation by monetary restraint. The possibility naturally arises -- indeed, Caroline Atkinson has already predicted it in this newspaper -- that Reagan will suffer the same vicious circles of recession and failure.
But Reagan's deeper supply-side covictions -- and more committed Cabinet -- make this result unlikely. If Congress accepts the three-year schedule for Kemp-Roth, reducing the top tax rate on income to under 38 percent, the benefits will be even more dramatic than Reagan's advisers predict.
The current tax structure, in combination with transfer payments that must be given up as earnings rise, imposes marginal tax rates of over 50 percent on over half of the earners in America. This means that most Americans can do better by hiding a dollar of existing income than by earning another dollar: a sure formula for a tax system that on the margin loses more revenue than it gains. Moreover, these rates doubly penalize savings, both by detering the effort to earn the additional dollars that are most likely to be saved and than by taxing the returns at the highest rate.
As has been shown repeatedly in both the United States and Japan, cutting marginal income tax rates will therefore impart twice the stimulus to savings as to comsumption. In the lower brackets, people pay off debt and in the upper brackets they leave newly unprofitable tax shelters. Since the U.S. economy is swimming in consumer debt and honeycombed with tax shelters -- and since personal savings are near all-time lows -- there is vast room for response to substantial cuts in tax rates. The combined benefits of the Reagan programs on revenue, outlays and private savings mean that Kemp-Roth can be enacted without creating unmanageable federal borrowing requirements.
Overseas experience, however, strongly shows that these benefits cannot be achieved through the approach of focusing on corporate tax cuts or through the kind of compromise tax bill reported out of the Senate Finance Committee and now widely supported in Congress. Both Britain and Sweden maintained prescisely this combination of high rates on personal income and low rates on corporatins during the very years that their productivity plunged and their economies failed. Britain, in fact, has 100 percent one-year depreciation of investments, while Sweden raises just 4 percent of its tax revenue from corporations, less than any other European country and approximately one third of the U.S. proportion.
The result is to concentrate most capital spending within the existing corporate structure and slowly to transform corporations from instruments of production into vessels of disguised consumption. Employees who cannot take money out of the firm without facing confiscatory taxation instead are compensated with company cars, vacation resorts, housing and other perks. These devices tie down workers to particular firms, obstruct entrepreneurship, foster totally spurious "captial formation" and retard productivity and growth.
The world's fast-growing Asian economies, on the other hand, have combined monetary restraint with lower rates of taxation on personal incomes and higher rates on corporations. Japan, for example, has depreciation allowances similar in effect to ours but has far lower marginal rates on comparable levels of personal income, with a top bracket of 70 percent that applies only to earnings over $396,000.
Under current political circumstances, so-called "surgically targeted" tax cuts are particularly perilous in the United States, as in England, because the likely beneficiaries are heavy industries in decline like steel and autos, and housing, already massively subsidized (though the United States has for decades spent an eight-times greater portion of its capital on housing than European countries and a three-times greater share than Japan). The decline of the housing, auto and steel industries portends a desirable shift in the U.S. economy toward vitally needed investments in energy, high technology, sophisticated services and other entrepreneurial ventures. Any effort to retard this change will greatly damage the nation's future.
The one bad portent in Reagan's speech, therefore, is his apparent nostalgia for the days when the United States dominated the world's horizons with industrial smokestacks. Those days are happily gone forever. But as is shown by the British experience -- as well as by the effects of the Chrysler bail-out on Ford and General Motors and by the continuing romance of subsidized synfuels -- smokestack fetishism can lead rapidly from small doses of "targeted aid," on into the deadly addictions of lemon socialism.
The 1980s can be a period of global economic boom, as the energy prices recede as a result of new efficencies and natural gas and oil discoveries, and as the full potential of the microcomputer revolution unfolds. But the future can prevail only if governments do not allow themselves to be paralyzed by the claims of the obsolescent past -- the stagnant industries, socialist ideologies and government bureaucracies that stand between us and an exciting new decade of discovery and affluence.