WASHINGTON — Treasury Secretary James A. Baker III on Sunday said the Democrats' work on a tax increase package helped fuel the stock market's stunning fall last week.
Baker said tax bills approved by both House and Senate committees on Thursday have had a major effect on the market, where the Dow Jones industrial average suffered its largest weekly decline since World War II.
The Dow dropped 108.36-points on Friday, marking the first time the blue chip index has lost more than 100 points in a single session. The Dow dropped 235.48 points, or 9.49% last week.
"I think that the writing of these tax packages had a major effect in what's happened to the stock market over the course of the past three or four days," Baker said on NBC-TV's "Meet the Press."
"They are raising the corporate minimum tax, they are eliminating the deduction on completed contract accounting, which hits the entire defense industry, they are doing other things in the area of business taxes that make business extremely nervous," he said.
"So it's not unusual--it doesn't seem to me--to see an adverse stock market resulting from what they're doing."
Sen. Lloyd Bentsen (D-Texas), chairman of the tax-writing Senate Finance Committee, suggested Sunday that Baker's comments showed he was "out of touch with reality, living in a dream world."
The House Ways and Means Committee voted 23-13 along party lines Thursday on the $12.3-billion tax plan aimed at upper-income Americans.
The bill is designed to raise revenues and mitigate the impact of $23 billion in mandatory deficit reduction required under budget-cutting legislation that goes into effect Nov. 20.
Rep. Dan Rostenkowski (D-Ill.), chairman of the Ways and Means Committee, said Saturday that Republicans would rather see automatic deficit reduction measures kick in than be recorded in favor of tax increases. He said that strategy would result in drastic and indiscriminate cuts in health, education and defense programs.
President Reagan has threatened to veto measures that include tax hikes. Baker said those increases are unacceptable to the Administration.
"We ought not to rush out here and raise taxes, depress the economy, when things . . . are looking fundamentally pretty good," the Treasury secretary said.
Bentsen, in a statement, said: "The immediate cause of last week's stock market drop was the sharp jump in the prime rate. Interest rates shot up because of our persistent trade deficit and budget deficit and this Administration's refusal to develop policies to reduce them.
"Anyone who says otherwise is out of touch with reality, living in dream world," he added.
Major banks two weeks ago raised their prime rate, a benchmark used to set interest on a variety of corporate and consumer credit, from 8.75% to 9.25%. One bank, New York's Chemical, raised its rate again last week, to 9.75%.
Also last week, the Commerce Department said the trade deficit in August dropped to $15.7 billion, down from the one-month record of $16.5 billion in July but still greater than analysts had expected. The trade gap is mounting at a record annual rate of $171 billion this year.