Are Tax Cuts Enough?
LEKACHMAN, ROBERT
BOLSTERING A SLUGGISH ECONOMY Are Tax Cuts Enough? By Robert Lekachman The approach of the holiday season conventionally stimulates the economic forecasters to confide their projections...
...The simplest way of concentrating benefits upon those who will spend them most enthusiastically is to increase the present $600 exemption to $900 or $1,000...
...The mood of the meeting emerged in the statement that Dr...
...Thus the omens are favorable that personal income tax rates, and probably corporate income tax rates as well, will be lowered in 1963...
...It is discouraging that business investment is expected to decline next year in spite of the incentives which a solicitous Congress offered in 1962...
...No Administration two years away from a Presidential election could ignore the 1963 outlook...
...A general tax cut will do little to ameliorate their hardships...
...After all, in any general business expansion corporate profits and individual incomes rise...
...Secretary of the Treasury C. Douglas Dillon appears partially converted to this hypothesis, even though he has couched recent statements in the older and more conventional vein of encouraging incentives to investment and spending...
...But at this point in time, a general tax reduction is just about the minimum response that any intelligent American President could make to the urgencies of the new economic stagnation...
...The most optimistic among them predict moderate expansion in 1963, and the pessimists anticipate a new recession...
...In its 1962 tax act, Congress proved much readier to open new loopholes than to close old ones...
...The drawback to tax cuts which reward the well-to-do is an intensification of the very economic inequality which may already be part of the problem of economic sluggishness...
...On the whole, it is...
...In sum, it is dubious whether a tax cut is by itself capable of restoring a high rate of economic growth...
...Since much new capital investment economizes on labor, one consequence of encouraging new investment is increasing unemployment in specific places...
...A heavy corporate income tax diverts more than half of new profits into the hands of the tax collector...
...On social grounds we need more public investment instead of a tax cut...
...Heller has been recorded in favor of a $5 billion reduction, including a slash in the corporate income tax rate from 52 to 47 per cent...
...The danger of inflation from a larger budget deficit is minimal in an economy running so far below capacity...
...Although he added that " recession-around-thecorner views aren't clearly justified either," the tenor of his judgment was far from euphoric...
...In the past decade our society has moved scarcely at all in the direction of more substantial economic justice and fuller employment of men and machines...
...Ominous hints have been made that the President and the Bureau of the Budget have been taking a tough Une with departmental bids for new programs and larger support of old ones...
...My final reservation concerns adequacy...
...Such a change would be sensible if it were joined to the elimination of some of the loopholes which enable the recipients of large incomes to avoid paying much of their taxes at this and lower rates...
...Given the realities of politics, the danger exists that higher personal income tax rates in general will be reduced and loopholes will be left undisturbed...
...What we might gain by widening the scope of government action is suggested by Edward Dennison's more recent Sources of Economic Growth...
...The recipients of large incomes have already been potentially aided by the investment tax credit and the new depreciation policies...
...economic expansion...
...Per Jacobsson of the International Monetary Fund, has taken an increasingly benign view of American budget deficits which are explicitly designed to promote U.S...
...The new shape of the demand for labor penalizes the unskilled and the semi-skilled...
...He added that since corporations had already been granted major concessions in 1962-presumably in the shape of liberalized depreciation allowances and tax credits for new investment -"by far the major part" of the reduction in 1963 should apply to individual tax rates...
...While they also expected Gross National Product to increase by 2.5 per cent, the economists did not think that such an increase would suffice to absorb over a million new entrants to the labor force...
...Dennison calculates that we should add one-tenth of 1 per cent to our annual growth rate (say, $3.3 billion every year) by so simple a step as increasing the average length of schooling by a year-and-a-half...
...J. K. Galbraith's contrast of public squalor with private opulence is no less pertinent in 1962 or 1963 than it was in 1958 when he momentarily shocked the nation with The Affluent Society...
...In the second place, tax reductions which benefit largely upper-income recipients will encourage smaller increases in consumer demand than tax cuts which benefit individuals whose incomes are small or moderate...
...If the President economizes on domestic programs in order to improve the prospect of tax reduction and tax reform, he will make a bad trade from the standpoint of the national need...
...Walter W. Heller, Chairman of the President's Council of Economic Advisers, has often argued that the progressive nature of the personal income tax and the burden of a heavy corporate income tax have the effect of generating budget surpluses so early in the course of economic recovery as to curtail these recoveries well short of full employment of men and resources...
...Concretely, a tax cut in 1963 is going to make it harder for the President to push through Congress a meaningful program of support for higher education or for secondary and elementary education...
...Francis Bator has demonstrated that we are actually spending a smaller proportion of our Gross National Product on non-defense government programs than we did before World War II...
...What so far remains unclear, however, is precisely what sort of tax program the Treasury plans to present to Congress next January...
...In the campaign for these changes, the Administration appears to be employing the same coordinated barrage of official statements and endorsements from private groups that proved so successful in its single success of the last Congress, the Trade Expansion Act...
...Hence the tax system operates to discourage spending, diminish investment, and check expansion long before such checks are advisable on anti-inflationary premises...
...Geoffrey Moore of the National Bureau of Economic Research offered his colleagues: the prospects for a vigorous renewal of business expansion in the near future don't appear bright...
...This is the possibility that the tax cut will be accepted by the Administration as an adequate alternative to Federal expenditures on schools, medical care, housing, urban slum clearance, and other elements of social investment...
...It is reasonable to assume that the poor spend more of any increase in their incomes than do the prosperous...
...Tax cuts will unquestionably stimulate consumer spending and may enlarge business investment, though the latter is the chancier of the two...
...Secretary Dillon has stated that " there will be sizable rate cuts, across the board...
...Is a tax cut in 1963 a good thing...
...There is a second qualification to this endorsement of tax cuts in 1963...
...The assumption is that the remainder of the tax cuts would serve as a means of persuading Congress to enact some tax reforms in the same act...
...It will also intensify the difficulty of securing appropriations to support promising programs in manpower retraining under the Area Redevelopment Act and Manpower Retraining Act...
...By Robert Lekachman The approach of the holiday season conventionally stimulates the economic forecasters to confide their projections to a larger public than their professional colleagues...
...The Question of Public Spending, mit's Dr...
...In short, 1963 threatens to continue the decade-long sluggishness of American economic growth, by now a bipartisan phenomenon...
...If rates were made somewhat lower, but opportunities to avoid paying them were diminished, then there would be genuine merit in cutting apparently punitive top rates, which now largely serve the purpose of creating mistaken public sympathy for the individuals who are allegedly incurring these rates...
...Even that darling of conservative financial opinion, Dr...
...The economy is suffering from a chronic deficiency of aggregate demand for goods and services...
...The encouraging narrowing of white-Negro income differentials and the approach toward greater equality of general income distribution, which were hailed in the 1940s, will not resume in 1963...
...These loopholes are known to center on stock option arrangements, capital gains provisions, and mineral depletion allowances...
...In his provocative book...
...But at the same time he has emphasized that the objective of rate revision will be to produce balanced budgets at full employment, though presumably not before that point...
...These are predominantly Negroes and Puerto Ricans...
...And nothing suggests that 1963 will substantially transform the prospect...
...But how good the tax cut will be depends on the manner and the incidence of the reductions...
...Many economists have proposed the reduction of the 91 per cent maximum to something like 65 per cent...
...Like the President, Dillon has coupled tax reductions with tax reforms, but he has opened the door to the enactment of some of the tax reductions early in the session...
...The Kennedy Administration's specific for the malady of economic inertia is a revision of the tax system...
...At a recent conference under the auspices of the University of Michigan, it was the consensus of a group of 30 economists that average unemployment would rise to about 5.7 per cent in 1963...
...Such an objective implies considerable sophistication in any Secretary of the Treasury, for it implicitly accepts the Keynesian implication that budget deficits are appropriate at positions short of full employment...
...In the first place, the result is inequitable...
...A steeply progressive tax system draws off ever larger percentages of the increases in personal income...
...Whose taxes does the Administration plan to cut and by how much...
...We are in the midst of an industrial transformation which promises-the better word may be "threatens"-to automate our offices as well as our factories...
...This says nothing about the possible gains to be had from an improvement in the quality of education...
...And it will offer another excuse for opposition to the already mangled foreign aid program...
...As usual, unemployment will be particularly grave among the least-protected and lowest-paid groups-Negroes and Puerto Ricans...
...Still more cheerlessly, the economists concurred in the expectation that business investment will diminish slightly next year...
...Steel will operate at low percentages of capacity...
...Such an outcome would be highly undesirable on two grounds, at the least...
...It is a misfortune of general tax reduction that it is unlikely to stimulate expenditure on the very things that our society most desperately needs...
...Unemployment will be substantial...
...This year by and large the prophets are in a glum mood...
...Robert Lekachman, Associate Professor of Economics at Barnard College, writes regularly in these pages...
...Take a program which concentrates upon the top incremental rates in the personal income tax schedule...
Vol. 45 • November 1962 • No. 24
