THE CONVENTIONAL and traditional way for tax law to encourage investment and saving is to provide tax incentives specifically limited to them. But there is nothing conventional and traditional about the Reagan tax strategy. Congress begins its examination of the amdministration's program this morning as the House Ways and Means Committee opens its hearings.
President Reagan proposes very broad tax cuts to leave more cash in people's hands, and he is willing to assume that enlightened self-interest will do the rest. Mr. Reagan firmly disapproves of attempting to manipulate people's economic decisions through the tax code, and believes that too much of that sort of thing in the past has created, among investors, an atmosphere of demoralization and pessimism that he now intends to transform.
There's a disconcerting looseness to that logic. In a tax cut of this gigantic scale the country deserves a bit more reason to believe that the performance will actually be related to the purpose. If people were to spend more of the tax cut than the administration expects, and save less of it, the effect would be a dangerous acceleration of inflation. It's not much of an answer to say, as the administration does, that it has great faith in the public's desire to save and invest more -- much more -- than it has done in previous similar circumstances. The tax strategy is the weaknest part of Mr. Reagan's economic program.
Americans are now saving their money at a rather low rate, in comparison with the past. But when you consider the perverse effects of inflation and the present tax laws on the incentives to save, it's only surprising that the saving rate isn't still lower. The interest that your savings earn is, with trivial exceptions, fully taxed. In contrast, the interest that you pay on money borrowed is fully deductible. The Reagan administration does not suggest changing these anomalies. It merely urges broad reductions in the tax rates for all income, in the hope of mitigating them.
There's a certain semantic imprecision to all the talk about saving and investment. In a certain technical sense, the income that isn't spent must be invested. But many kinds of investment are utterly unproductive and have nothing to do with the kind of industrial revival that Mr. Reagan sees in prospect. Speculating in gold, or real estate, is unproductive in that larger economic sense. So is the purchase of antiques, or rare stamps, or all the other articles whose function is to sit in vaults and appreciate. A lot of money goes into those investments without creating any jobs except, perhaps, for brokers.
The same unfocused quality informs the administration's views about reducations in business taxes. Again, it urges very broad cuts through the acceleration of depreciation. That will put more cash in companies' hands, but lets them decide how to dispose of it. A tax law designed explicitly to accelerate industrial investment would, instead, cut the taxes only on profits that were actually reinvested.
Throughout the country there is widespread agreement that saving and investment rates need to be higher. Should not at least some of this tax cut address that necessity specifically? The administration's state purpose is a useful and sensible one. It's the method that's in doubt, and that's the debate that begins today in the Ways and Means Committee.