Analysis: Kennedy's Tax Program:

...Congress is a collection of small potentates who are usually far more responsive to the special interests which clamor for favors and threaten retaliation at the polls if they are refused, than to the distant claims of the national interest...

...But this choice was partially blocked by balance of payment difficulties...

...Their present privilege of paying American corporate income tax on profits earned abroad only when they return these profits to the United States has had the effect of imposing a disadvantage on companies which operate entirely within the United States...

...To some businessmen to begin with...

...Many of these tax credits would be windfalls, the lucky consequences of a decision to invest this year or next year instead of last year...

...The brave words of the campaign, the exciting visions of the task force reports and the fabled influence of John Kenneth Galbraith have apparently yielded to a yearning for changes which do not of themselves unbalance the Federal budget, and for programs which pose no greater challenges to Congress than that sluggish body has accustomed itself to meeting comfortably...

...It may well be that Chrysler badly needs to revamp its facilities in order to compete with its major rivals in the auto industry, but it will gain no stimulus to do so from the tax credit proposals because it has been earning no profits this year...

...Why should stockholders be uniquely favored...

...These would have served the immediate needs of anti-recession policy by increasing payments to individuals and encouraging consumer spending...

...The thread of inequity extends still further and affects the general public...

...But there is, to begin with, reason to doubt that much investment will take place because of the proposal...

...The tax credit provision fails these tests...

...or he might have persuaded the country and the Congress to embark on a substantial program of Federal expenditures, financed out of deficits and designed to promote recovery and encourage desirable public programs...

...and it is painfully ill-designed to solve the problem of unemployment...

...If the President had proposed that a tax credit be offered to each home or car buyer, cries of outrage would echo through the land: Why should automobile buyers or home buyers get tax concessions...

...The second, less intrepid firm would benefit and the first would be penalized for its enterprise...

...But there is little reason to believe that these tax credits can gain these ends...

...The nation's complacency about unemployment should dispel another illusion: the pleasant conviction that Congress and the general public will never again put up with substantial unemployment...

...They also would have helped diminish the scandalous national neglect of our cities and schools...

...The message also addressed itself to a series of tax advantages which American companies with foreign subsidiaries or branches now enjoy...

...Its central passage recommends " enactment of an investment tax incentive in the form of a tax credit—15 PER CENT OF ALL NEW PLANT AND EQUIPMENT EXPENDITURES IN EXCESS OF CURRENT DEPRECIATION ALLOWANCES—6 PER CENT OF SUCH EXPENDITURES BELOW THIS LEVEL BUT IN EXCESS OF 50 PER CENT OF DEPRECIATION ALLOWANCES...

...And, of course, there were many possibilities of combination among these policies...

...recession hits some industries much harder than others without regard to relative efficiencies...

...Many economists have complacently assumed that the general public and Congress have come to accept the principles of compensatory finance— the unbalanced budgets and public spending programs of recession, and the counterbalancing surpluses and debt reductions of prosperity...

...The apparent premise is the existence of an investment shortage...

...More importantly, we should be sure that a vital national objective is being served and that no better program to accomplish this purpose more equitably is available...

...No major expenditure program designed to combat the recession has been offered and none is promised...

...Nowhere does this irrelevance appear more sharply than in what is billed as the Kennedy program's key anti-recession measure...

...The actual Kennedy program is a series of cautious extensions of older measures, such as unemployment compensation (which was also extended during the 1958 recession) and minimum wages, or final enactment of old proposals such as aid to depressed areas...

...Nor is it an adequate answer to say that profits are a measure of efficiency...

...Assume that the company's profits amount to $10 million...

...Similarly, the suggested repeal of the 4. per cent dividend tax exemption is a step in the right direction...

...And right now the other outlet for investment, modernization, threatens to add to the unemployment problem...

...When Kennedy assumed office in January the country had been in a recession for about eight months and there were few signs of its early termination...

...If no reference to mineral depletion allowances is to be found, it may be that the President decided that this was not an opportune time to engage Texas in mortal combat...

...Its major rival, perhaps more hesitant to adopt new techniques and more cautious in its estimate of business prospects, postponed its investment program until 1961...

...It is not equitable...

...He might have used the Eisenhower Plan: hope for the best, assume that recovery is around the corner, propose a series of limited actions mostly within the control of the executive branch of the Government and stall for time...

...If the tax credit does stimulate new plans or revisions of old ones, then the effect of the investment will be felt only after a time lag of 6, 12, or 13 months...

...The President's tax program is not in itself bad...

...THESE THREE months have taught us the necessity of re-examining some of the clichés of the political scene...

...The credit is subject to an overall limitation of 30 per cent tax reduction in any one year and various safeguards will prevent companies from accumulating investment until they make enough to earn a tax credit...

...ANALYSIS Kennedys Tax Program By Robert Lekachman President Kennedy's tax message to Congress makes it clear that the Administration's policy is to pretend that the recession has either ended or is rapidly expiring...

...His belated tax program favors business rather than individual spending and has little relation to the recession...

...In view of the actual condition of the automobile and the home building industries, a tax credit to customers might have more to recommend it than a subsidy to stockholders...

...If this professionally flattering belief were ever true, the eight Eisenhower years have changed things...

...SINCE the President's tax program is apparently the last piece of "anti-recession" legislation that he plans to offer, this is a good time to ask what has happened to the brave hopes of only a few months ago...

...But at a time when many major industries are manifestly suffering from excess capacity and oppressively large inventories, it is difficult to see the need for plant extensions...

...The first concerns the general acceptance of popular Keynesian theory...

...Yet neither Congress nor the President seems greatly alarmed and many Americans appear willing to tolerate a great deal of unemployment as long as it doesn't touch them personally...

...The Kennedy of the task force reports might have preferred to reduce personal income taxes for several excellent reasons: Public works frequently are slow to accomplish their effects...

...TAX POLICY, it might be answered, always represents a compromise among desirable objectives...

...While it is entirely conjectural how much genuinely additional investment this proposal would foster, it is unfortunately quite evident that a good many businesses would undeservedly benefit from it...

...indeed much of it is aimed at remedying abuses that have long cried out for attention...

...If Kennedy continues to play the private political game of Washington and neglect the weapon of mass enthusiasm, then there is no hope this year and not much more the year after or the year after that one, that Congress will feel itself called upon to rise from its conservative slumbers and face up to the great economic challenges of our time...

...But the blunt fact must be faced that these measures, desirable as they are in themselves, are irrelevant to an economy which badly requires a stimulus for recovery and reallocation of its resources for sound, balanced growth...

...Perhaps he is hampered by the conservative mood of both Congress and the country and is biding his time to fight again when the odds are more nearly even...

...If the program is really designed to improve our capacity to compete with European rivals, then its benefits should be centered upon the export industries, not on business in general...

...But the excuse is not good enough...

...Consider, for example, a firm whose current depreciation allowances amount to $10 million...

...Take the case of a company that modernized its facilities in 1960 and, therefore, has no need to invest for some time to come...

...Possibly out of nostalgia, the nation and Congress have embraced such easily comprehended objectives as balanced budgets and stable prices...

...This is a proposal to promote new investment by offering tax credits...

...WITH 10 PER CENT ON THE FIRST $5,000 OF New investment as a minimum credit" (caps in original...

...Perhaps the President would have been better advised to offer his tax advantages to publishers of good books, makers of scientific instruments, recorders of classical music and businesses that devote a substantial portion of their outlays to research...

...in these cases sales prospects, industry growth and the general business outlook are likely to be much more important than tax incentives...

...Perhaps it was this analysis that persuaded Vice President Nixon and Secretary of Labor James P. Mitchell to urge Eisenhower— without success—to reduce taxes during the 1958 recession...

...The program is a peculiarly wasteful method of assisting in the achievement of any major national goal...

...If the aim is the more ambitious, Galbraithian redirection of investment toward more socially desirable purposes, again tax credits should be confined to a limited number of industries...

...personal income tax reductions promote free choice by allowing individuals to make their own decisions about the allocation of extra resources...

...It is dispiriting but accurate to report that Kennedy actually has done far less than the minimum which his supporters could reasonably expect from a politician elected on the 1960 Democratic platform...

...Nor should it be forgotten that the plan benefits only those who are making profits against which a tax credit can be applied...

...It is very hard to discern in the President's balanced responses to press conference questions any trace of genuine urgency about the state of the economy, nor has he seen fit to lay his case before the nation in a major address...

...On the other hand, it may be that President Kennedy is a good deal more worried about unemployment than his actions indicate and a good deal more dissatisfied with the state of the economy than this legislative session promises to demonstrate...

...Still more actively, he might have urged a general reduction of personal income taxes, safeguarded by an automatic expiration date...

...If this be so, then his hesitancy to intervene, the pro-business emphasis of his tax program and the caution of his social welfare proposals truly represent the economic convictions of a leader with little real wish to alter our national manner of conducting our everyday lives, one who shares the conservative's fear of inflation and fiscal unsoundness...

...There is an almost eerie parallel with President Eisenhower's responses to the 1958 recession: the same limited reshuffling of Government programs so as to increase current outlays, the same prolonged meditation on the merits of reducing personal income taxes to stimulate consumer spending, the same repeated taking of the economic auguries, the same promises of detailed review some months hence, and now the same conclusion that the economy is improving of its own accord without need for battle with Congress over substantial spending programs or general tax reductions...

...Kennedy had a number of possible ways to combat the slump...

...Even so, much might be forgiven if the tax credit proposal at least served to stimulate recovery, end the recession and diminish unemployment to decent proportions...

...Essentially, cutting taxes is a conservative technique which emphasizes private spending and de-emphasizes public spending...

...The tax credit no doubt would influence a fair number of businessmen who are hesitating on the verge of decision...

...it does not attack existing misallocations of economic resources, and indeed may add to them...

...It is hard to avoid skepticism about a concession extended to so many varieties of business...

...As far as this year's recession is concerned, there is little to be expected even from the most favorable consequences of a tax credit...

...To whom is the proposal unfair...

...and their spending might have assisted some of the industries which were in the worst trouble, notably autos and appliances...

...Perhaps the price in equity would not be too high to pay, if, as the President argues, the nation's resources would be more efficiently allocated and investments in modern facilities would be encouraged by the proposed program...

...Finally, he might have pursued the route of encouragement to business, on the familiar conservative premise that the benefits would trickle down to the remainder of the population...

...The Kennedy of the campaign might have been expected to urge substantial public works programs...

...Improvements, in industry as in life generally, derive much more from investment in human than in inanimate capital...

...If this company undertakes a $20 million program of new investment, it can compute its tax saving by taking 15 per cent of the difference between S10 million (its depreciation allowances) and $20 million (its new investment), or $1.5 million...

...Under present laws, its corporate income taxes would be $5.2 million, 52 per cent of its total profits...

...That recession is now nearing its first birthday...

...A President who operates only within the bounds of political practicability will never find it feasible to ask very much of Congress...

...To treat the passage of an occasional item first proposed by Americans for Democratic Action in 1947 as a substantial progressive advance is to confuse newsprint for nutriment...

...A little more actively, he might have placed his bets on monetary policy, hoping that the tidy, efficacious and reversible mechanism of central banking pressure on interest rates would stimulate credit...

...When a single interest within the community is offered such tangible benefits, we ought to be certain they are distributed fairly among managers and stockholders...

...Administration pressure has had some small impact on long-term interest rates...

...Under the President's proposal, its taxes would fall to $3.7 million and its effective tax rate from 52 to 37 per cent...

...With one out of every 14 workers out of a job and many others working parttime, the unemployment problem is a pressing one...

...The slackening rate of the economy's contraction and improvements in economic indicators such as industrial production and automobile sales have apparently sufficed to persuade him that a really determined attack upon unemployment—still at nearly 7 per cent of the work force—is unnecessary at this time...

...If its major target is improving the efficiency of conspicuously laggard industries, then benefits should concentrate upon such disorganized areas as the construction business (instead, the President's program specifically excludes construction from its benefits...

...Robert Lekachman, who is an associate professor of economics at Barnard College, regularly comments on domestic economic developments for The New Leader...

...Our real investment shortages aren't in machines and factories, but in education, libraries, scientific research, museums and the array of activities which combine to improve the quality of human beings...

...What makes them more deserving than those who may have done their duty to the economy by buying a house only the year before...

...The vast majority of decisions, however, are made well within the margin of choice...

...This, indeed, is the heart of the matter...

...In fact, the allocation choice which is implicit in the tax credit notion is highly questionable...

...It has been one of Kennedy's conspicuous failures of leadership that he has encouraged these delusions instead of educating the nation to appreciate the Keynesian formula for proper government policy during nationwide recessions...

...This may be true within an industry, but not between industries in a business slump...

...Businesses which increase investment rapidly probably do so in pursuit of well-laid plans and not in response to a new tax advantage...

...A flat 20 per cent withholding on such earnings promises to add $600 million in new revenues and end some of the tax discrimination that favors those in the upper income brackets...

...It is easy to share the President's desire to end tax exemptions on such "business expenses" as hunting lodges and yachts, not to mention seaborne conventions and lunches at the Forum of the Twelve Caesars...

...It may be that the President is a good deal more conservative than either his rhetoric or his advisers intimate...

...Tightening expense allowances would discourage business waste, increase tax receipts and diminish the cynical immorality of an expense account society...

...As an anti-recession measure, tax credits suffer from a second drawback: It takes too long for their effects to be felt...

...This, in fact, is the usual excuse made for the President...

...The benefits will vary widely, but will be very substantial for some companies...

...These are all desirable reforms, and they presumably reflect the hard work of Stanley Surrey, the new Treasury Department tax chief, and a number of able economists...

...The President's major political function in our peculiar political system is to mobilize the support that he needs among the ordinary citizenry...

...The President is on equally firm ground in wanting to spread the tax net over dividends and interest...

...aside from this trivial success, the President has grasped none of the major opportunities which confronted him...