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Tax-cut tug of war

Failure of the White House and the congressional Democrats to reach agreement on a tax-cut plan is disappointing but not surprising. The Reagan plan is radical enough to concern even many Republican economists. So the Democrats cannot be faulted for resisting it on its economic merits. Yet the American people must hope that the two sides will muster the bipartisan spirit of compromise needed to come up with some program aimed at resusciating the economy. The national interest demands that the executive and the legislature not become locked in stalemate as they so often have in recent years.

There is reason to think that may not happen. President Reagan has already stepped down from his earlier 10-10-10 tax formula. He is now willing to accept a 5 percent reduction in taxes the first year with 10 percent the second and third. Is he willing to compromise further? The President continues to insist on "across-the-board, multiyear" tax cuts. But since the unsuccessful Oval Office meeting with Tip O'Neill and other Democratic leaders, the White House has pointedly sought to put the best light possible on the disagreements and to try to keep the dialogue going. Meanwhile, courting the Democrats, the President has backed down on some other, if more minor aspects of his tax program. He has accepted, for instance, cuts in the "marriage penalty," the maximum tax rate on investment income, and estate taxes.

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The Democrats, for their part, are edgy about adopting deep tax cuts for Americans at a time when the economy shows tentative signs of improvement and when big budget deficits loom. Mr. Reagan chided Wall Street for responding negatively to his tax proposal. But the fact is, even strongly conservative economists like Alan Greenspan challenge the Reagan budget figures. They see the fiscal 1982 budget running much larger than the one adopted by Congress. If tax cuts lead to substantial losses of revenue, hyperinflation could be fueled once more.

Mr. Reagan's persistent answer is that the tax cuts will result in increased savings and investment -- which, in turn, will spur the economy and increase revenue to the Treasury. It is a theory which one would like to see given a chance and tested. Yet there is widespread skepticism that most Americans would put their tax savings into the bank unless bigger tax incentives were voted for savers. Rather, it is felt, they would spend it, especially since for all but the wealthiest segments there would be relatively little relief. The result could be a surge of consumer demand and more inflation. This, combined with growing budget deficits, could worsen the economic picture.

Unless, that is, the President comes around to tackling one of the biggest inflationary pressures on the budget -- defense spending. The Democrats who control the House might in fact feel more inclined to cooperate with Mr. Reagan if he applied the same standards of cost-effectiveness and efficiency to the military establishment as he has to social programs and other areas of the budget.

Politics, of course, plays no small role in the tangled tax-cut fight. The Democrats clearly are reluctant to go along with a White House program because they feel it might fail and leave them unable to extract any political capital. At the same time they are afraid of bucking a popular President. The White House, in turn, wants the Democrats aboard to share the political risks. It is unrealistic to expect politicians to abandon their Machiavellian calculations altogether. But here is a national issue on which it is crucial that the Republicans and Democrats come to a meeting of the minds. Surely there is room for rational compromise by both sides when the health of the economy -- and the sta bility of the nation itself -- is at stake.

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