THE UNSENTIMENTAL people who make up the financial markets have never been enthusiastic about President Reagan's plan for a three-year series of tax cuts. The financial people -- the bankers, brokers and dealers -- are interested, above all, in the future of the inflation and its close companions, the interest rates. Under the Reagan plan, they anticipate a prolonged period in which interest would be high, volatile and very risky to both borrowers and lenders. Henry Kaufman of Salomon Brothers was speaking unusually sharply Wednesday when he warned against the implications of the Reagan tax cut. But his views are widely shared in Wall Street, and they deserve careful attention here in Washington.
The Reagan plan means parallel reductions in both spending and tax rates that would leave the deficit in roughly the present range for at least another year and a half -- even if everything goes as the administration anticipates. But things probably won't go as it anticipates. Federal spending over the winter was running significantly higher than projected, and the current fiscal year is already more than half over. The full fiscal impact of rising defense spending still lies ahead.
In the credit markets, the U.S. Treasury takes what it needs to finance the federal deficit, and the rest of the economy gets along with what's left. That makes people whose business is credit, like Mr. Kaufman, attentive to the forecasts of federal borrowing. They are particularly attentive these days because the Federal Reserve Board has repeatedly declared its determination to restrain the amount of credit available. If the federal deficit keeps pushing upward when the Federal Reserve is pushing down, the pressure will be expressed once again in very high interest rates. That in turn will mean poor growth in the real economy of production, profits and jobs. It will also mean a rising danger of industrial bankruptcies.
A large tax cut, in those circumstances can only heighten the tension. The administration argues that its tax cut will reduce inflation by encouraging people to work harder, save more and produce more. But the incentive effect would operate relatively slowly. The immediate effect, as Mr. Kaufman observes, would be a leap upward in spending and inflation.
There's a wide consensus that some sort of tax cut is necessary this year to offset some of the recent increases imposed by inflation as it pushes people up into higher tax rates. But the size of that tax cut is the crucial question. Mr. Reagan's plan would decrease revenues by $54 billion in fiscal 1982, with further decreases in the following two years. A Democratic alternative, offered by Rep. Dan Rostenkowski, chairman of the House Ways and Means Committee, suggests a one-time cut of about $40 billion. But the economy is running unexpectedly strongly, and the administration's campaign to control spending has slipped a little behind schedule. Even Mr. Rostenkowski's suggestion of $40 billion is beginning to look too large.