House Republican leaders yesterday called for a $36 billion tax cut effective Oct. 1 to prevent the recession from becoming deeper.
Directly disagreeing, Treasury Secretary W. Michael Blumenthal told the Senate Budget Committee, "It would make no sense at this stage to rush in with a program to pump up the economy by either a new tax cut or spending programs, or by an easing of monetary restraint."
And in Atlanta, Federal Reserve Chairman G. William Miller said, "I don't think we're going to have a serious and prolonged recession. I do not think it is appropriate to make major changes at the moment."
House Minority Leader John J. Rhodes (R-Ariz.) said the $36 billion tax cut should be implemented now to prevent the deepending of the recession, rather than next year, an election year, when the economy may be improving and the tax cut would fuel inflation.
The Republican tax cuts would include:
A reduction in personal income tax rates of at least 10 percent that would be worth $28 billion.
A freeze on Social Security taxes at 1979 levels, which would block a $3.3 billion increase set for Jan. 1.
An increase in the rate of which business, for tax purposes, can write off investments in buildings, equipment and vehicles that would reduce taxes $5 billion in the first year and significantly more in later years.
"This will help to regain some of the ground the taxpayer has lost, and will continue to lose, as a result of the Democratic Inflationary recession . . .", Rhodes said at a news conference.
Neither Blumenthal nor James McIntyre, director of the Office of Management and Budget, ruled out a tax cut or other action if the recession becomes significantly worse.
"We are sensitive . . . to the fact that in the coming months economic conditions may change more substantially than we now anticipate," McIntyre told the same committee. If that happens, he said, "We will modify the tax and the budgetary recommendations that we make to the Congress."
The administration conceded in its mid-year economic forecast, released Thursday, that the economy is in a recession, and predicted that it will last for the remainder of he year.
Blumenthal said that there is not enough evidence on how severe the recession will become "to justify pushing the panic button on macroeconomic policies."
"There could be no credibility, at home or abroad, in our dedication to conquer inflation if we were to switch policies with each swing of the statistics," he argued. "An expansionary policy now would aggravate inflationary pressures and divert resources needed to solve our productivity and energy supply problems."
Blumenthal also all but ruled out lowering interest rates as an alternative to cutting taxes or increasing spending. "The constraints imposed on monetary policy by the condition of the dollar are greater than they ever have been," he said. "That imposes a severe limitation on the use of monetary policy for counter-cyclical purposes."
The level of interest rates in different countries is often an important factor in determining the foreign exchange value of each country's currency. When rates are higher in one country than another, that tends to attract investors from other nations, but they, in turn, must buy the first country's currency in order to make their investments. Those purchases increase the currency's foreign exchange value.
Rising interest rates abroad, particularly in Germany, have caused the value of the dollar to slump in recent weeks.
"Holding fiscal policy firm and just going down on interest rates," Blumenthal said, "would not be appropriate under the circumstances. And if we got into international difficulties [with the dollar], we could not pursue that policy anyway."
The Republican leaders claimed that their tax cut would not increase the 1980 budget deficit. Rep. Jack Kemp (R-N.Y.) went so far as to say that not a nickel would be added to the deficit because the tax cut would increase employment and output.
Kemp said that if unemployment went from 5.6 percent to 7.2 percent because of the recession, that would cost the government $20 billion to $30 billion in added unemployment compensation and other income support payments, plus a loss of tax revenue.
The tax cut would help the economy enough to offset the effects of the recession fully, producing enough added reserve to wipe out any increase in the budget deficit that the tax cut otherwise would cause, he maintained. CAPTION: Picture, Treasury Secretary W. Michael Blumenthal testifies against a tax cut. By James K. W. Atherton - The Washington Post