Reagan's 'supply side' economics: In Roth-Kemp, GOP showcases some new, untried ideas
Conservative Ronald REagan offers an unconventional and untested economic program for the United States. When cheering convention delegates consider the party platform July 15, little fuss is expected over the plank calling for sharp cuts in tax rates, which Mr. Reagan and Republicans in Congress have already endorsed. The draft platform supports the Roth-Kemp tax- cutting legislation, named after sponsors Sen. William V. Roth Jr. (R) of Delaware and Rep. Jack F. Kemp (R) of New York, that calls for a 30 percent cut in personal income-tax rates over three years and faster write-offs for business.
The popularity of "supply side" economics -- measures like Roth-Kemp aimed at increasing production, savings, and investment instead of consumption -- has grown in recent years. But it remains based more on economic theory than observed fact, many economists agree.
Most controversial is the notion that quick and sizable reductions in tax rates will so stimulate the economy as to produce as much new tax revenue as was lost through the reduction in taxes.
For individuals, the idea of tax cuts has obvious appeal. The Roth-Kemp approach promises to boost take-home pay for the average American worker by $409 in 1981; $807 in 1982; and $1,368 in 1983.
For the Republican Party, embracing broad tax cuts as the top economic priprity marks a pronounced shift in economic philosophy. In its 1976 platform, the Republican Party stressed balancing the federal budget as the most important step toward a sound economic policy. No detailed plan for cutting taxes was offered, although the concept was endorsed
In 1980, the reverse is true. While saying that a balanced budget is essential, the Republican platform avoids specifics on how to achieve it.
But on the question of tax cuts, the platform refers twice to Roth-Kemp legislation and pledges imeediate action to implement such a policy if the nation elects a Republican president in November.
Noting the shift in Republican economic philosophy, Senator Roth endorsed the platform as the "most progressive" in 50 years for the Republican Party.
However, some economists criticize the proposal for quick and steep tax cuts as misguided. Indeed, they charge it will worsen the federal deficit and therefore be inflationary.
"It's not conservative economics," charges economist Thomas Sargfent of the University of minnesota. He says the Republicans should continue in their conservative tradition of making a balanced budget their top goal.
"The Roth-Kemp idea s fallacious. There is absolutely no evidence it will not worsen the deficit," he said in a telephone interview. Mr. Sargent contends the evidence from past US economic experience shows that if tax rates were lowered, workers would be tempted to work less, rather than more.
The Roth-Kemp bill is founded on the theory of the "Laffer Curve," as put forth by University of Southern California professor Arthur B. Laffer. It says that there is a point where tax rates become so prohibitive they act as a disincentive for workers to work harder and increase their wages. When taxes reach this level, cutting rates would actually increase revenues as the incentive to work is restored and workers grow more ambitious.
However, no one is sure of the precise level of taxation at which this disincentive to work occurs.
"We all agree that there must be some income-tax rate so high that it will se" verely discourage work effort and saving. Whether we have reached such a tax rate in the United States is an empirical question that is not easily resolved," said Alice M. Rivlin, director of the Congressional Budget Office, to the Joint Economic Committee recently.
While the Congressional Budget Office has urged Congress to place more emphasis on stimulating the supply side of the economy, director Rivlin said there is no evidence that tax cutx of the magnitude called for by Roth-Kemp will pay for themselves.