Cutting Taxes and Balancing Budgets

...There is no question that a great many liberals, not to mention all admirers of John Kenneth Galbraith, strongly prefer the first means of supporting aggregate demand...

...If, said he, something were not done quickly to stimulate the economy, then conditions would worsen and the Federal government would be fatally tempted to undertake huge new spending programs...

...What this budget omits, however, has become increasingly important: the income and the outgo of the gigantic trust funds through which we administer our Social Security program and huge highway construction program...

...What he discovered was illuminating...

...it is a far superior guide to the control of both inflation and recession...

...Although President Kennedy is still inexplicably watching the economic indicators and speaking wistfully of postponing action until next year, in this instance Congress may be more eager to move than the President appears to be...

...The statistical indicators of future trouble are far too numerous to encourage optimism...

...Perhaps our financial managers will reap their reward in heaven...

...As we shall see, our way of keeping national accounts has the unfortunate effect of exaggerating public deficits and minimizing occasional surpluses...

...For once liberals and conservatives, unions and business groups concur on the desirability of a sensible economic response to possible recession...

...Liberal economists have tended to prefer an increase in tax exemptions—possibly from the present $600 to $1,000 per person —which has two advantages: People with low incomes, whose need is greatest, will get the bulk of the reduction...

...It is a time of growing public consensus about both the present condition and the general prospects of the nation's business...

...Perhaps this budget's principal advantage is one of timing...

...Germany incurred a deficit 4 out of the 6 most recent years of the period...

...And since six months on the average elapse between the time a tax liability is incurred and when it is discharged, alterations in tax liabilities will not show up in the cash budget until some months after the onset of a recession...

...In this world, however, the French and the Germans have enjoyed impressive economic success and worried very little about balancing their budgets...

...But, according to the data, at the least large deficits and rapid economic growth are mutually consistent...

...Reliance on the administrative budget as the single measuring rod not only damages economic policy...

...BUDGET COMPARISONS: 1961 (in millions) Total Receipts Total Expenditures Surplus or Deficit National Income Accounts Budget $94,800 97,000 —2,200 Consolidated Cash Budget 97,242 99,528 —2,286 Administrative Budget 77,659 81,515 —3,856...

...Worse still, the failure of the labor force to expand according to reasonable demographic expectations strongly implies that many young people, housewives, and elderly men and women have retired in despair from a job market which offers so little prospect of employment...

...And now that the legislative logjam shows signs of breaking, a realistic look at our budget conventions is in order...

...But even this not entirely convincing argument has now vanished...

...Operating within the national income framework, this budget measures the direct influence of Federal taxing and spending on the flow of income and output...

...Now such evidence does not logically demonstrate that large budget deficits inevitably generate vigorous economic growth...

...When seasonal influences are eliminated, total employment in June gained only 43,000, which represents the smallest month-to-month increase of the year...

...The price that liberals must pay for business acceptance of elementary fiscal policy is a tax cut which more closely resembles the distribution of political and economic power than it does an optimum technical response to an economic contingency...

...But even upon this treacherous issue a measure of agreement appears probable...

...An understanding of the three budget methods and an increasing use of the national income variant should contribute to public enlightenment and the recognition that budgets are only technical devices, subject to varying formulations and differing interpretations...

...There are three major varieties of national budget, the most familiar of which is the administrative or conventional budget...

...Nor were our deficits particularly large...

...In a valuable study of European postwar fiscal experience, Andrew H. Gantt II, of Harvard University, carefully adjusted French, English and German budget data for the period 1950-1960 to make the information correspond to American administrative budget measures...

...budget...

...Chamber President Plumley, in a letter to Senator Harry Byrd (D.-Va...

...It is an unusual analyst indeed who is prepared to say the economy is acting satisfactorily...

...Thus, the ultimate impact of the tax reduction or the expansion of government spending will be some multiple of the budget deficit which is deliberately incurred...

...Conventional and cash budgets both record tax receipts as they are collected by the Treasury...

...The point is worthy of emphasis...

...Obviously, the national income accounts budget is by far the best guide to the timing of fiscal policy...

...From the narrow standpoint of fiscal orthodoxy, the United States has been closer to the path of rectitude than France or Germany...

...For some time now, the National Bureau of Economic Research's leading indicators of impending business cycle turns— among them new business orders, business failures, and stock market prices—have been flashing red...

...The inclusion of the trust funds enlarges the size of Federal government accounts by something like $25 billion each year...

...Political leaders can either increase government expenditures on desirable social projects such as education, health, urban renewal, scientific research and recreational amenities, or they can reduce taxes...

...There is at last hope that neither a misreading of European success, a confusion of thought on the meaning of national budgets, nor the opposition of fiscal primitives will obstruct reasonable technical reactions to economic stagnation...

...See chart...

...and it tends to diminish the fear of deficits which many people still retain...

...But since this budget includes only receipts and outlays which directly influence current income and output, government transactions in loans and mortgages are excluded...

...With only a few exceptions, leaders in business, labor, liberal opinion, and even government have expressed public concern about the economy's failure to gather momentum...

...These astute Europeans clearly prefer a strong U.S...

...In either case, a new recession will be starting from the highest level of unemployment and the least convincing recovery of the postwar era...

...Plumley's route to tax reduction was unusual, but at journey's end he was securely in the camp of the Keynesians...

...Despite its appearance of detailed precision, it actually cannot amount to more than the Bureau of the Budget's educated guesses about the size of the Treasury's cash receipts during the coming fiscal year, and the volume of its cash disbursements from Congressional appropriations and other sources in the same period...

...The cash budget also covers the operations of such government-sponsored institutions as the Federal Deposit Insurance Corporation, the Federal land banks, the home loan banks and the intermediate credit banks...

...pointed out a good conservative's reasons for supporting immediate tax cuts...

...Even more striking is the spectacle of labor and management spokesmen—the United Auto Worker's Walter Reuther and the Chamber of Commerce's Ladd Plumley—in broad agreement on the appropriate economic responses to the U.S.' unsatisfactory rate of recovery from the 1960 recession...

...Administration conservatives like Treasury Secretary C. Douglas Dillon and Under Secretary Robert V Roosa have used our balance of payments difficulties as an argument against larger deficits...

...Walkers in large cities and readers of educational and social statistics are likely to concur in this preference...

...Meanwhile, retail sales have slipped, and business investment has persistently failed to increase according to the projections of the President's advisers and other analysts...

...On grounds of practical policy and political reality, even the AFL-CIO favors a tax cut...

...Too many other elements have entered into the economic success of France and Germany...

...It also exaggerates the size of deficits...

...growth to European as well as American prosperity...

...Steel, in an ironic footnote to the quarrel between Roger Blough and President Kennedy, has announced a reduction in the price of line-pipe in the wake of its June decrease in the price of secondary sheet steel...

...Thus the cash budget is considerably more realistic as an economic measure of government impact than the administrative budget...

...The administrative budget, quite typically, portrays the deficit as being approximately 70 per cent larger than it appears to be in the national income accounts budget...

...economy to a balanced U.S...

...But while government spending may be more desirable than tax reductions, there is little or no reason to believe that Congress will agree with this value judgment...

...In fact, it is deliberately designed to identify the entire flow of money between the Federal government and the public at large, is free of the legal distinctions which impair the usefulness of the administrative budget, and does include the receipts and outlays of the Social Security and highway trust funds...

...Consistently, American deficits were a much smaller percentage of American gross national product than were French deficits...

...As for steel, output is little more than half of capacity...

...But they will be very speedily noted in the national income accounts budget...

...These conventions have played a role in the creation of unrealistic public responses to fiscal policies...

...They do so on the familiar ground that the contemporary allocation of resources between public and private uses severely discriminates against government functions...

...Respectable economic theory— that is, Keynesian analysis—offers an alert government two alternative methods of handling an economy which is plagued by a persistent deficiency in aggregate demand...

...France had a deficit for 10 consecutive years...

...But most economists prefer still a third variant, the national income accounts budget, to measure Federal impact upon the economy...

...Gantt first asked how often, according to American definitions, these three European nations and the United States incurred deficits...

...Take economic diagnosis first...

...The point is readily made by a comparison of the 1961 deficit according to each of the budget concepts...

...Currently, every economic justification favors an immediate tax cut of some $10 billion...

...Though fairly technical, the point is extremely important...

...They will also spend a larger proportion of any increase in their incomes than their more fortunate fellow Americans...

...There is little doubt that President Eisenhower and his administration so reinforced the mythology of the budget that many earnest Americans have come to believe an unbalanced budget is a sign of national weakness and a certain invitation to inflation...

...This is the set of numbers—bulking about as large as the Manhattan telephone directory—which the President presents each January to Congress...

...The experts who unanimously endorsed the report agreed that larger deficits were now appropriate, and left wide open the door to their achievement by either tax cuts or increased public expenditures...

...On June 16 Business Week, usually a trifle to the left of its business constituency, came out formally for a $10-billion tax slash: $2.5 billion in the shape of a reduction of corporate income taxes from 52 to 47 per cent, and the remainder in the form of reductions in personal income taxes now applied to all tax brackets...

...Both devices have the effect of placing larger sums of money in the hands of individuals and, if the tax cut extends to corporate income taxes, business...

...About the only sensible question to ask right now is whether recession has already begun (as the stock market appears to have concluded), or whether it is fated to commence early in 1963...

...But actual collection need not coincide with maximum impact upon the taxpayer...

...These deficits, they maintain, promote inflation and frighten the foreign holders of American dollars and convertible assets...

...The national income accounts budget records business taxes as Treasury income when they are accrued as liabilities, and personal income taxes when they are withheld from wage and salary checks...

...Moreover, for the second consecutive month, average factory hours-per-week declined from 40.6 in May to 40.4 in June...

...Indeed, the national income accounts budget possesses at least three shining virtues: It more properly reflects the state of financial relations between the Federal government and the remainder of the nation...

...The second of these budget variants, the consolidated cash budget, is less misleading about the size of government operations...

...And reduction in average factory hours worked is frequently seen as a prelude to layoffs and furloughs...

...Consequently, it gives a more accurate reflection of the financial effect of taxes upon those who pay them...

...Trust funds are included...

...A businessman guides his actions by the current balance sheet on which tax accruals affect the figures...

...Unemployment sticks stubbornly at about 5.5 per cent...

...The United Kingdom ran a deficit 9 out of 11 years...

...There is general recognition among realistic liberals that the only tax reduction which stands a chance of Congressional approval will be one which offers benefits to corporations and wealthy individuals as well as other segments of the population...

...Tax cuts at least increased the degree of private discretion in the spending of income and recognized the advisability of reducing imposts which are "so burdensome to private initiative and accomplishment...

...Naturally, the public consensus tends to break down in this country once one raises the practical question, whose taxes shall be reduced...

...As for the U.S., it had a deficit 6 of the 11 years, a smaller percentage of the time than any other country...

...The May report of the Economic Policy Committee of the Organization for Economic Cooperation and Development underlined the dangers of continued inadequate U.S...

...The happy recipients of these benefits will spend the bulk of their windfalls...

...What makes the possibility of a tax reduction infinitely more promising is the conversion of the Chamber of Commerce to a policy of deficit financing...