Debate Over Deficits, Taxes Centers on Different Views Of the Reagan Legacy

BENEATH the debate over President Clinton's stimulus and deficit-cutting package wrestle two different views of how the economy works.

At its most purely economic, this debate is a technical one over which is more important to economic growth: cutting the deficit or cutting taxes.

Mr. Clinton and his aides describe his campaign against the skepticism of Republicans and some conservative Democrats in Congress as an effort to reverse the Reagan revolution of 1981.

President Reagan clearly put tax-cutting as his top priority while deficits set records. Clinton is proposing to raise taxes to control the deficit.

Clinton made a deal late March 8 with the House Budget Committee to cut from his proposal an additional $63 billion in federal spending over five years. The deal was struck among politicians in the middle concerned about credible deficit reduction and wary of raising taxes.

The debate is not solely an economic one, of course.

At its most parochial, it is over which regions and interest groups sacrifice most.

At its most political, it is over who should benefit most from growth: the affluent, who save and invest most, or working- and middle-class people, who benefited less from growth in the 1980s.

At its most philosophical, the debate is about the size and role of government. Mr. Reagan said he thought the federal government should be smaller and cheaper, and regulate less. Clinton is outlining a more active government role in managing the economy.

What the economic debate often comes down to is this: What really happened in the 1980s?

The view prevalent among House Republicans, for example, is that the Reagan tax cuts of 1981 created the longest peacetime economic expansion on record. Inflation was tamed, and the Dow Jones index spiraled upward.

The rich got richer, but they paid an increasing share of the nation's taxes, even at the new lower rates, so everyone benefited.

A key statistic for this supply-side view: In 1981, the Internal Revenue Service reported about 5,000 people with $1 million or more in taxable income. In 1982, the first year of Reagan tax cuts, 11,000 people reported million-dollar incomes, even though it was the trough of a recession.

The view in the Clinton White House is that the rich paid more taxes in the 1980s chiefly because they made so much more money. Meanwhile, household incomes for average families barely increased at all, and only then because increasing numbers of women were going to work. The nation's income was increasingly concentrated at the top.

The signature statistic for the 1980s, according to chairman of Clinton's Council of Economic Advisers Laura Tyson at her confirmation hearing, is the rise of the proportion of families in poverty from 12 percent to nearly 20 percent.

THE debate over Clinton's policy is being fought in the middle ground. The extremes on both left and right, liberal Keynesians and conservative supply-siders, believe that deficits matter little. Both have been left on the sidelines.

Most of the players in the current debate see impacts from deficits and taxes.

Warwick McKibbin, an economist at the Brookings Institution, has plugged the Clinton program into a model of the world economy.

The result is that the plan stimulates the economy over the next year, due to slightly increased government spending, fallen interest rates, and a weakened dollar from anticipated deficit reduction. During the next two years, the effect of higher taxes dominates other factors to slow the economy down some - perhaps half a percentage point in annual growth. By 1997, low interest rates begin to outpull the drag of higher taxes to speed the economy up.

Richard Vedder, an economist at Ohio University in Athens, Ohio, is skeptical. "The impact of deficits on interest rates is very nebulous," he says.

Dr. Vedder says that Clinton's economic advisers are ignoring the lessons of the '80s. "It's as if Laura Tyson woke up after a 10-year sleep," he says.

Another conservative economist, Marvin Kosters of the American Enterprise Institute, observes that Dr. McKibbin may be right in the direction that Clinton's plan will pull. But the health of the economy will ride on much larger factors than Clinton's budget.

The lessons of the Clinton years may be as hard to sort out as those of the Reagan years, however. Notes Dr. Kosters: "It will be extremely difficult to tell if the economic test was passed or failed, even 10 years from now."