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Economists Fear Middle-Class Tax Cuts Will Increase Deficit

By Clay Chandler
The Washington Post

With both congressional Republicans and President Clinton pledging a middle-class tax cut, many economists said Monday they feared that such a move would result in an overheated economy and a growing federal budget deficit.

Clinton and his advisers met Monday to review options for a tax cut proposal of about $50 billion to $80 billion over five years as part of preparations for the fiscal 1996 budget submission. House Republicans have proposed a $500-per-child tax credit estimated to cut the tax bill for 50 million families by $107 billion over five years.

While there may be political benefits in cutting taxes for middle-class families, many economists said they could see little economic rationale for the move at a time when the economy is operating close to full capacity and the Federal Reserve is aggressively raising interest rates to slow economic growth.

"Consumer spending is already running at a boom-like pace," said Stephen Roach, chief economist at Morgan Stanely. "The last thing we need to do now is pour more fuel on the fire."

"The timing for this kind of policy change is poor," echoed Charles Leiberman, managing director at Chemical Securities Inc. With both Clinton and House Republicans calling for tax cuts, he said, "the bond markets are reacting negatively. The market is concerned that fiscal policy will become overly expansionary."

Bond prices fell sharply Monday, pushing the yield on the benchmark 30-year Treasury bill, which goes up as prices fall, to 7.92 percent from 7.85 percent late Friday.

In recent weeks, administration officials - including White House Chief of Staff Leon E. Panetta, Office of Management and Budget Director Alice M. Rivlin and national economic adviser Robert E. Rubin - have stressed that Clinton's budget proposals would not add to the deficit, and therefore will not pump new stimulus into the economy.

White House officials have described the tax cut for the middle class as a matter of fairness. The objective, they said, is to provide some financial relief to beleaguered middle-class households which, they say, have not shared equally in the gains of the recovery.

But many economists said they worry that, in giving ground on tax cuts, Clinton will weaken his ability to hold the line on deficits.