THROUGHOUT the rapidly changing, even chaotic, effort to reach a budget deficit reduction agreement, one theme, at least, has remained pretty constant: tax breaks, the Bush administration keeps saying, are necessary to induce the wealthy to save and invest more of their money for the good of the country. Does that sound all too familiar? If this brand of tonic were sold in bottles, the Surgeon General would require a label with the message: Warning -- this medicine hasn't worked in the past and may be severely harmful to your economic health.
It was the active ingredient in President Reagan's original supply-side theory with which he justified the enormous 1981 tax cut. Does anyone at the White House remember what the then-secretary of the Treasury Donald T. Regan said that year as the president's chief spokesman on the subject? "The saving generated by the tax cut will be more than enough to cover any deficit from a tax cut . . ." You know how that turned out.
There was much more of the same from all of the Reagan administration's strategists. The great surge of savings would raise business investment to levels unprecedented in this country, they assured Congress, with commensurate increases in the standard of living. In fact, in proportion to the size of the economy, investment actually declined. Ever since then it has remained lower than when Mr. Reagan first took office.
Why? The fatal miscalculation involved savings. With the fall in the savings rate, the country faced a shortage of capital that continues to the present. When the tax cuts opened up those gigantic budget deficits, the federal Treasury had to compete with private investment for that inadequate supply of savings. The result was the high interest rates with which the country has been living ever since. High interest made investment costly and discouraged it.
That experience ought to make Americans wary of claims that tinkering with the tax system can accomplish large changes in people's behavior. There was a certain logic to the Reagan program in theory, but in practice it has been a failure. People's spending and saving habits have proved remarkably resistant to the incentives that the tax cutters dangled in front of them. The tax inducements to invest were overwhelmed by the financial effects of the deficits. That's why reduction of the deficit is far more important than tax changes in reviving industrial investment.
President Bush still seems to feel that, in one form or another, more tax breaks are necessary to improve the economy's performance. But they didn't work in the 1980s, and it's very hard to see any reason why they would work any better in the 1990s.