There is a growing dispute within the Reagan administration over economic policy--specifically over how much to increase taxes in order to offset the mounting budget deficits officials now foresee in coming years.
The battle, whose outcome will determine the future shape of President Reagan's economic plan, is being fought at Cabinet level between Treasury Secretary Donald T. Regan, who opposes large future tax increases, and Office of Management and Budget Director David A. Stockman, who would prefer higher taxes to a larger deficit in the out-years of 1983 to 1984, sources said.
Although Stockman is said to have a stronger role in White House policy making, the political disadvantages of proposing or concurring in large tax increases so soon after this year's enactment of the major tax reduction bill that Reagan pushed through Congress could work against the budget director. The administration does not want to seem uncertain in its economic views.
Both Stockman and Regan have warned recently that new economic forecasts would show much larger budget deficits for 1982 through 1984, partly as a result of a more slowly growing economy. Stockman warned this week that without further action on the revenue and spending side, the 1984 deficit could soar to $100 billion.
But though both officials have publicly backed off somewhat from Reagan's commitment to a balanced budget by 1984, Regan is much more reluctant to consider large tax increases to shrink the deficit, administration sources said.
For one thing, the treasury secretary seems somewhat more concerned than Stockman over the developing recession. In testimony yesterday he warned that "massive tax increases" in the face of the current recession "might be counterproductive." He said, in answer to a question, that he would not favor tax increases over the next three years in the $70 billion to $90 billion range. President Reagan has proposed $22 billion of increases over that time span.
A White House economist earlier this week said net tax increases or "revenue-enhancers" in the range of $50 billion could be likely. Some tax cuts could be included in such a package, the economist said, and the total revenue raising justified on the grounds that since Congress has failed to match the revenue losses of last summer's tax cut with sufficient spending cuts, it must now "enhance revenues."
As it becomes harder to win congressional agreement for spending cuts, budget officials believe it is necessary to make up ground on the revenue side, and that this would be better than allowing the deficit to swell significantly. Stockman this week emphasized that deficit control is now the crucial task for the administraton.
Unlike Reagan, he has not ruled out large tax increases as a means of accomplishing his goal, saying the administration was open to suggestions from Congress about how to close the budget gap. One main suggestion from Senate Republicans has been higher taxes.
Officials now admit that the president's earlier economic projections were too optimistic. But they have not yet agreed on a new economic forecast, the treasury secretary said yesterday. The forecast debate is linked with that on tax increases and further spending cuts, as the projected deficit depends crucially on what economic assumptions are fed into the forecast.
A more optimistic version of the forecast would show a smaller deficit and thus require less action in the way of tax increases or spending cuts. Regan said the numbers should be agreed upon in the next several days between Treasury, OMB and the Council of Economic Advisers.
Sources have said that Treasury's role in shaping both the forecast and the debate on tax increases is much less than that of OMB partly because of the divergent views within the Treasury Department between "supply siders" such as Assistant Secretary for Economic Affairs Paul Craig Roberts and monetarist Beryl Sprinkel.
Although he spoke of the danger of a "prolonged" recession, Regan also forecast that the economy would begin to revive in the spring of next year. Jerry Jordan of the CEA said recently that while he expects strong growth in the second half of next year, he believes the first half is very uncertain. An official yesterday said he believed views were "converging" on the forecast.
Budget officials claim that the kind of "revenue enhancing" that the administration is considering, with tax loopholes being closed and revenues "raised around the margin," would not threaten the economy during a recession.
Regan argued strongly for keeping the 10 percent cut in tax rates due next July as a way to help the recovery which he predicts in the first half of next year from faltering.