Early in the evening of Jan. 15 on Capitol Hill, Ronald Reagan's two top economic advisers ran into congressional resistance that endangers the new administration's daring plan to expand the economy with radical tax reduction proposals that may be larger, not smaller, than the campaign version.
Treasury Secretary-designate Donald T. Regan and Budget Director-designate David Stockman met not anti-tax cut Democrats but pro-tax cut Republicans. From 5 p.m. to 7:30 p.m. that glum winter evening, they conferred with Rep. Barber Conable of New York and five other Republican members of the House Ways and Means Committee. The lawmakers unfurled a yellow flag of caution.
The Ways and Means Republicans clearly favored slipping the effective date of the tax cut from Jan. 1, 1981, to at least July 1. That intensifies current backstage debate over that issue within the Reagan team. It also creates problems for even bolder plans still being incubated by Reagan's advisers.
Still in the preliminary stage are plans for a quick drop in the present 70 percent marginal tax rate on "unearned" (dividends and interest) income down to 50 percent, accompanying the 10 percent, first-year cut in individual income tax rates (which range up to 50 percent) on "earned" income. That has been savored in the secrecy of Reagan counsels as the bold stroke to revolutionize investment in America.
Since hardly anybody pays taxes at rates higher than 50 percent anyway, the revenue loss would be minimal even for the short run. Investors would emerge from their cozy tax shelters, which seldom contribute to growth, and put their money in productive investment. Even skeptics of supply-side economics concede that this would generate a move from tax-free municipals to industrial stocks that would revitalize the stock market.
But this idea is undermined by postponing the effective date of the tax cut to late this year. If tax cuts are not retroactive, the prospect is for a drastic slowdown in the markets. Even those who dispute the deadening effect of a delayed overall tax cut concede it would dilute the new treatment of "unearned income" by delaying investment plans.
The Republican House members meeting Reagan and Stockman left no doubt that they preferred a delay in the tax bill's effective date. While giving lip service to the Kemp-Roth tax bill the past three years, they never had wholly embraced its radicial concept. They were still hypnotized by the green-eyeshade view of budget deficits. They thereby continue traditional Republican folly that began when Herbert Hoover in 1930 deepened the Depression by raising taxes and continued when Richard Nixon in 1969 invited recession by backing the surtax.
The congressmen seemed more interested in the fine print of budget deficits than the prospect of headlines about big growth. Neither of Reagan's Cabinet members either agreed or dissented. Stockman, who along with writing a new budget is counted on by supply-siders to protect their cause, was burdened by the flue that forced him to a sickbed that night.
Actually, Stockman himself is ambivalent. Unlike Hoover, Nixon and their congressional descendants, he does believe that only growth-inducing tax cuts can balance the budget in the long run. But short-run deficits may divert him, particularly the prospect of tax refunds for a 1981 tax cut coinciding with a 1982 cut.
Only non-inflationary growth -- the basic goal of radical tax reduction -- can dispel worries of perpetual runaway budget deficits. That puts special light on the backstage debate between New York City economic consultant Alan Greenspan, the orthodox outside adviser to Reagan, and supply-side Washington tax consultant Norman Ture, newly tapped as Treasurey undersecretary for taxation.
Ture, who drafted the original Kemp-Roth bill and wants tax cuts retroactive to Jan. 1, is predicting they will bring much higher economic growth (and therefore lower deficits) than is Greenspan. In truth, there is a difference of goals. "The basic problem that faces the new administration is to lower rates on long-term bonds" (to cut inflationary expectations), Greenspan told The Wall Street Journal the same day of that meeting on Capitol Hill.
That was not the campaign theme of Ronald Reagan, who talked of growth and economic regeneration, not lowered bond rates. It is indeed the president-elect himself on whom supply-siders must depend for a retroactive Jan. 1 tax-cut date as pledged during the campaign. On the morning of Jan. 16, presidential counselor Edwin Meese told newsmen over breakfast that the retroactive tax cut is "very probable."
But "very probable" is not "certain." That long conference on Capitol Hill evoked the nightmare chain reaction of delaying tax reductions until the budget-cutting battle predictably ends in failure -- a failure that will predictably become the reason for not reducing tax rates. Confident though they are of Reagan's ultimate instincts, the supply-siders approached the inauguration chilled by the orthodoxy on Capitol Hill.