I am in a terrible quandary. The Reagan tax cut made its modest appearance in my paycheck last week, but even after poring over the administration's economic pronouncements, I am at a loss to decide how I can best use it to support the president's program.
Some administration spokesmen suggest, for example, that the tax cut will stimulate consumer demand, thereby encouraging business to invest and produce and bringing the economy out of recession. Under this theory, the best thing I can do with my tax cut is turn it over to my wife or my oldest son and thereby immediately translate it into consumer demand in the marketplace.
This vestigial Keynesianism is hotly contested by the supply-siders in the Treasury, however. For these true believers, the only route to economic recovery is through increasing saving, which will lower interest and induce businesses to invest regardless of market demand.
But this route has some practical difficulties. In our family, the best saver is our youngest son. But he refuses to deposit his savings in a bank, thus keeping it from eager investors. Worse, he frequently lends it--at exorbitant rates--to his mother, or his older brother, who immediately channel it into consumption, thereby frustrating the supply-side theory. I could put the money into a bank myself, but I have no guarantee that the bank will not distribute it in credit to spendthrift holders of credit cards.
Complicating my decision further is the administration advice to the effect that the tax cut is part of a broader strategy to shift the burden of helping those in need from public to private hands. Government grants, in this view, have discouraged private giving. The budget cuts, by reducing these grants and increasing the need for private charity, thus work hand in hand with the tax cuts, which make more private resources available to take up the slack. According to this thinking, the best way to support the president may not be to spend my tax cut, or to save it, but to give it away.
Even here, however, complications arise. Charitable contributions are tax-deductible. If I increase my charitable contributions, my taxes will go down. However, if my taxes go down, the president will not be able to afford our defense buildup. Worse still, he might be forced to accept a higher deficit But if the deficit grows, more pressure will be put on the credit markets, interest rates will increase and the economy will sag further--necessitating additional tax cuts.
I am eager to do my bit to help make the president's program work. But it would help if he and his advisers provided better clues about which programs they would like me to work on.