It's a cherished Washington ritual by now. The Reagan administration announces cutbacks in social welfare programs. A few moments of stunned silence follow while the affected interests regroup. Then they strike back. Friendly journalists are provided with information that -- according to studies, no less -- this cut or that will make homes unaffordable for 334,296 families or increase the number of low-birthweight infants by approximately 24.77721 percent. The stories are reported under lurid headlines ("Reagan Cuts to Cause Mass Starvation, Studies Say"), and right-wingers complain about the media's liberal bias.
An interesting variant is being played out these days on the subject of Treasury Secretary Donald Regan's tax reform plan. Last Tuesday's New York Times business page contained two essentially identical stories side by side: "Economists Are Wary of a Shift in Tax Policy" and "Economic Drag Seen in Tax Plan: Regan Outlook Challenged by Many Analysts." The Washington Post followed on Wednesday with, "2 Studies Fault Treasury Plan." The burden of these stories was that econometric models had shown that Regan's plan would be bad for the economy.
The "economists" and "analysts" cited in these articles are generally in the employ of industries that would face higher taxes under Regan's scheme. This is by no means all industries. Regan's idea is to wipe out all the special incentives for different kinds of industries and investments, and to use the savings to lower business tax rates overall. Most academic economists agree with Regan that, by letting the free market decide how investment capital is allocated, this reform would be just great for the economy.
It's true that Regan's plan also involves, for technical reasons, a slight shift in the tax burden from individuals to corporations. But this is outweighed by the wholesome effect to be achieved by cleaning up the Augean stable of economic distortions. Anyway, this shift barely begins to reverse a shift the other way that's been going on for decades.
Econometricians can prove anything, for a fee. My favorite study so far in this round is one commissioned from Chase Econometrics by the National Restaurant Association. As reported in The Post's "Washington Business" section Dec. 3, it concludes that a limit on deductions for "business" meals would actually incrase the federal deficit in 1985 by exactly $3.7 billion. When I called the restaurant people to ask for a copy of this remarkable study, I was told it's not available yet. But a few questions revealed that the study purports to measure only the effect of such a reform on the restaurant industry itself. In other words, the fact that money not spent on three-martini lunches will be spent on other things -- or, even better, will be saved and therefore available for investment -- did not enter into the calculations.
The flaw in econometric studies showing an overall decline in investment and GNP resulting from Regan's plan is a bit harder to explain. First, the econometric models are not designed to appreciate the difference between a wasteful tax shelter and a truly productive investment. Therefore, they do not measure the greatest achievement of Regan's plan: the elimination of economic distortions. Second, the models simply are not equipped to account for the dozens of changes Regan proposes. For all their complexity, they're not sophisticated enough. Third, the models show Regan's plan lowering interest rates and therefore reducing the federal deficits thanks to lower payments on the national debt. Perversely, at a time when everyone agrees we need to reduce the deficit, this gets fed back into the calculations as a reduced stimulus, and therefore bad for the economy.
Nevertheless, a study by Wharton Econometrics, one of those cited in all the business stories, shows GNP after 10 years essentially the same under Regan's plan as under the current system, despite increased levels of consumption the whole time. Sounds pretty good to me.
Another piquant detail not reflected in the alarmist headlines comes from a study by Data Resources, Inc., intended to show that accelerated depreciation and the investment tax credit -- two special incentives Regan would eliminate -- stimulate more new investment than do lower tax rates generally.
According to The Times, the study shows that "accelerated depreciation provides an increase in business investment of 81 cents for every dollar of tax revenue lost, while the investment tax credit provides 76 cents," and lower corporate tax rates provide only 19 cents. What this actually proves is that tax incentives for business are a terrible bargain. Even according to their strogest advocates, they cost the government more in lost revenues than they produce for society in new investment.
What the business opposition to Regan's plan, studies and all, amounts to is an assertion that the free market doesn't work. The message is, "We need government assistance." This is not a cry that ordinarily evokes much sympathy in the business community. I know of one person who believes quite strongly that self-reliance and the free market are the correct paths to prosperity. When will President Reagan speak up on behalf of his Treasury secretary's masterpiece?