In a nearly unanimous, bipartisan report, Congress' Joint Economic Committee broke with the Carter administration and the budget balancers on Capitol Hill yesterday and recommended a $25 billion tax cut next fiscal year.
Many members of Congress in both parties are arguing that the budget for the year ahead must be tightened to combat inflation, and the Carter administration is already considering proposals to reduce the $15.8 billion deficit in the spending plan it sent to Congress a month ago.
But the JEC, in its annual report on the economy, said that, far from being too generous, the Carter budget is too tight for the good of the economy.
Congressional economizers want to reduce the size of the government relative to the gross national product, or the economy as a whole. The joint committee said the right way to do that is not to cut spending, but to expand the economy, which a tax cut would help do.
"More rapid growth in the private economy is the appropriate means for acheiving a reduced federal share of the nation's output of goods and services," the committees said in a report that drew only two partial dissents from the 20 members.
Carter did not propose a tax cut in his budget. In fact, the budget is predicated on an increase in effective tax burdens, even though administration economists say they think the economy is headed into recession. The committee said this was wrong, that "fiscal policy . . . has become contractionary in the course of the past year," and that this policy "has contributed to the worsened economic outlook."
Even as the committee's report was issued, however, Carter's economic advisers were meeting in the Capitol with leading Democrats, first from the House, then the Senate, in closed-door sessions to discuss new anti-inflation proposals.
Representing the president in the extraordinary sessions were Treasury Secretary G. William Miller; budget director James T. McIntyre Jr.; Energy Secretary Charles Duncan; domestic affairs adviser Stuart E. Eizenstat and Council of Economic advisers Chairman Charles Schultze. e
They met with about a dozen leading members on the House side, then the same number of senators. Among alternatives discussed were new spending cuts and selective credit controls.
Chairman Russell B. Long (D-La.) of the Senate Finance Committee said afterward, "The only thing ruled out" by the administration spokesman "was wage and price controls. Anything else is inside the ballpark."
The president ordered his aides to review administration policy last week after new reports showed inflation ran at an annual rate of more than 18 per cent in January.
The committee, headed by Sen. Lloyd M. Bentsen (D-Tex.) and with Rep. Clarence J. Brown, an Ohio conservative as the ranking Republican from the House, is hardly a hotbed of liberalism. Bentsen and Brown claim the tax cut they want would not be inflationary because it eventually would lead to more investment and greater productivity.
However, the report skips over the principal administration concern that calling for a tax cut before there is clear evidence the economy is skidding into a substantial decline would make worse the inflationary psychology gripping financial markets. Contrary to the JEC's view, those markets regarded the 1980 and 1981 budgets as likely to fuel inflation, a conclusion that has sent bond prices tumbling and interest rates soaring.
The JEC gave no details of its tax cut proposal other than to say faster tax write-offs for business investment, a rollback in Social Security taxes and other forms of personal and corporate tax reductions should be considered.
Despite statements by Bentsen and Brown that the committee members have risen above political partisanship in this election year to issue once again a unified annual report, Sen. William Proxmire (D-Wis.) and Rep. Parren Mitchell (D-Md.) dissented sharply from some of the key recommendations.
"While I favor a tax cut" Proxmire said, "I believe it must be earned. A tax cut which merely added to the deficit would itself be inflationary. The tax cut must be earned by cutting spending and balancing the budget."
Mitchell wanted part of the $25 billion set aside for a stand-by counter-cyclical program targeted to areas of high unemployment.
The committee also reported preliminary results of a study done for it by Data Resources Inc. (DRI), an economic consulting firm headed by Otto Eckstein, to determine the likely impact of business tax cuts to stimulate investment.
Increasing the present 10 percent investment tax credit to 12.7 percent and also reducing the average tax write-off period for investments by four years -- a combination that would reduce business taxes by about $11 billion the first year and several times that much as time progressed -- would lead to a reduction in the 1990 inflation rate by about 1.3 percentage points.
Cumulatively, the level of prices by the end of the decade would be about 4 percent lower than without the business tax cuts, DRI found.
By 1985 the cuts would raise the level of productivity by 1.2 percent, raise real wages by 0.9 percent and real consumption by 0.7 percent, the study said.
Meanwhile, Senate sponsors of a resolution to cut federal spending by limiting it to 21 percent of the gross-national product won a tactical victory last night when the Senate leadership agreed to schedule a vote on the proposal by March 24.
Leaders of the group, which now includes 44 of the 100 senators, invited the White House to come up with its own version of a spending cutback formula in the meantime. Earlier, some of the senators had threatened a filibuster if a vote on their resolution was not permitted.