Negative readings on tax-cut platform

Paul A. Samuelson, the economist, maintains there is a lot of wishful thinking in the "supply-side economics" espoused by Republican presidential candidate Ronald Reagan and the wall Street Journal.

"i don't think one should get one's hopes up," the Massachusetts Institute of technology economics professor said in an interview. "it is mostly an advertising slogan in search of a product."

Of course, Dr. Samuelson has been a frequent adviser to Democratic presidents and presidential candidates. Presumably his criticism of this new wave of economic theorizing could be partisan. But he has support from some economists with solid Republican credentials, such as Herbert Stein, who was President Nixon's top economic adviser for several years.

The keenest advocates of supply-side economics argue that a sharp cut in marginal tax rates quickly would so stimulate production and productivity (dealing with the supplym of goods and services to the economy) by encouraging people to work harder that federal revenues would not decline. The extra productivity would also reduce inflation. The tax cut idea also appeals to conservatives who would like to trim the size of government.

But Professor Samuelson comments: "I don't think there is any scientific research behind it [supply-side economics] that is impressive. There are almost no journal articles that take these things seriously. They are not buttressable by time-series analysis or Harvard case studies or that sort of thing."

He was referring to articles in such serious economic publications as the Journal of Political Economy or the American Economic Review.

Farther along Massachusetts Avenue, at Harvard University, Dr. Martin Feldstein says of this you-can-have-your-cake-and-eat-it-too economics, "I don't take it seriously."

Dr. Feldstein, who is also president of the prestigious National Bureau of Economic Research, notes that none of the economic research on "estimating the labor supply function" backs up the simple version of the so-called "Laffer curve." Arthur B. Laffer, a professor of the University of Southern California, holds that as tax rates rise above a certain level, revenues decline as people decide that taxes are so high it no longer is worthwhile to work so hard. Thus a tax cut can boost revenue. This reduces supply-side economics to a chart.

The evidence of solid economic research is contrary to the Laffer theorem, Dr. Feldstein says.

It may be true, he continues, that for the very wealthy, high marginal tax rates may discourage more work. It may also be true that some low-income individuals may prefer welfare payments or other government "income transfers" to hard work for their income.

But the bulk of government revenues comes from the vast middle-income area. Here a sizable real cut in tax levels will not produce all that much extra work or gains in productivity. "It would cost revenue," Dr. Feldstein asserts.

The controversial Kemp-Roth tax-cutting legislation -- proposed a 30 percent cut of individual and corporate taxes over three years -- is partly a "mirage," notes this "independent" economist, who has advised both Democratic and Republican presidential contenders (he helped candidate Carter four years ago). That's because today's high inflation rate is quickly shoving individuals into higher income-tax brackets and boosting their real tax burden.

"it would be a give-back of revenue from 'bracket creep,'" he said. "It is not a tax-cut."

Having made such criticism of the extreme advocates of supply-side economics, Dr. Feldstein does see the need for the United States to provide more incentives for savings and capital formation as a way of stepping up the level of investment in new, more productive plant and equipment.

That, he contends, partly explains why such European nations as Belgium, France, and West Germany have had rapid gains in productivity in the last decade. These nations have high overall tax loads -- higher in relation to national income than that in the United States. But the tax burden on capital formation and savings is relatively low, while that on consumption is comparatively high, through such devices as the value-added tax.

Dr. Feldstein advocates various tax measures to encourage savings and capital formation. These might include some exclusion of the interest income on savings from taxation, more generous investment tax credits, and, most important, the adjustment of depreciation for inflation. In reckoning their taxes, businesses should be able to "index" to some price measure the amount of depreciation they take on plant and equipment.

In effect, Professors Samuelson and Feldstein are warning voters: Look with skepticism on any promise that taxes can be cut without any equivalent increase in the budget deficit or cut in spending -- that such a tax cut would quickly increase productivity and reduce inflation. It just isn't that easy or simple.