A Time for Taxes

...A key element in present inflationary pressure is the private investment boom...

...Here it is worth recalling that in no modern industrial economy save the American is there any tendency to label 3.7 per cent unemployment as the equivalent of full employment...

...Such considerations come close to identifying a desirable 1966 tax increase program...

...The same Act reduced corporate income tax rates and thus enlarged the flow of dividends to stockholders, overwhelmingly in the upper reaches of income distribution...

...Unless taxes are raised the pressure will grow to reduce public spending not so much on older social programs as on the Great Society activities already severely curbed in the Administration budget...

...In these circumstances it is not astonishing that prices are poised to move upward...

...If real output increases 5 per cent this year, a substantial gain in a time of tight labor markets, prices still must rise 3.5 per cent to reach the $735 billion GNP commonly forecast...

...As for business investment, the lower of two recent surveys of business plans predicts a 16 per cent rise over 1965's boom level...

...While suspension of the investment tax credit is a step in the right direction, it is in itself not enough...

...The Tax Reduction Act of 1964 sharply diminished the progressivity of the personal income tax and did little or nothing to plug up some of the notorious loopholes in our tax arrangements...

...Certainly if Joseph Alsop is correct in his belief that U.S...

...One menace to sensible policy is the possibility that an Administration which has hesitated too long to propose moderately restrictionist measures, will finally go too far in tightening credit, reducing civilian spending, and increasing tax burdens...

...In this buoyant atmosphere, construction, railroad and other unions press for wage gains in excess of guidepost levels, individual prices edge upward, and the capacity as well as the will to honor the price guideposts slowly erodes...

...Every hint of escalation in Vietnam, every uncertainty about the level of military expenditure stimulates business purchase of raw materials as a hedge against future scarcity and future controls, and consumer buying in anticipation of prospective price increases...

...In 1966 our commitments to social improvement, continued economic expansion, and reasonably stable prices all dictate higher Federal taxes...

...and the public has been sedulously led to anticipate still further reductions...

...How soon the President asks for higher taxes depends on how quickly he seeks additional funds for Vietnam...

...Two major indicators of continued business expansion are the behavior of unemployment and the intentions of investors...

...Thus the unusual harmony among Kennedy economists like Tobin, Heller and Samuelson, and Eisenhower economists like Arthur F. Burns and Raymond J. Saulnier on the desirability of a switch to restrictive fiscal policy and higher taxes does not represent a reversion to the "old economics" of constantly-balanced budgets and neutral government operation, as some commentators have carelessly written...

...As Tobin observed in his Congressional testimony, modern fiscal theory urges governments to step on the accelerator of tax reductions whenever economic activity is slack and to pull firmly on the brake of tax increases when economic activity threatens to strain economic resources...

...Nevertheless, in the short run, new investment simply expands the demand for scarce resources and pays their owners incomes which add to current demand without increasing current supply...

...The pessimists contend that the gain in output will be smaller and the leap in prices larger...

...James Tobin, a member of the original Kennedy Council of Economic Advisers and a committed exponent of expansionary policies, testified in Congressional hearings early in March in favor of a tax increase "without further delay...

...Once this is understood, the interesting questions concern the way the taxes ought to be increased...

...Until very recently employers in the United States have enjoyed the sort of slack labor market which permitted them to set high standards of education and skill for new employes, and to throw the burden of training and assistance upon public funds...

...To some extent these reductions have benefited almost all income recipients, but they have been especially kind to upper income earners...

...Although he commenced with a glowing testimonial to the success of past tax cuts, he now warned his hearers of a time for change: "The government quite properly kept its foot on the accelerator...

...Thus in an economy dominated by events in Vietnam the best to be hoped for is a holding operation which minimizes the damage to Great Society programs, a moderately restrictive fiscal program which still permits unemployment to sink toward 2.5 per cent, and a distribution of new taxes which imposes burdens on those best qualified to endure them...

...Even this limited set of objectives demands of Congress the courage to impose new taxes in an election year and requires of the public at large the sophistication to absorb Lesson Two in modern economics-there is a time for taxes to rise just as there is a time for taxes to fall...

...What has altered the forecasts, above all, has been expectations of escalation in Vietnam...

...In March few if any continue to do so...

...It would be a shame to endanger the achievement by failing to use the brakes...

...One way to approach the question is to note how taxes have recently been reduced and the distribution of the benefits of the reductions...

...Surely Secretary of Labor Wirtz was correct in his identification of 2.5 per cent unemployment as a possible and a desirable next target of public policy...

...It may restore some perspective to observe that even a 4 per cent price increase is less than England survived last year...

...At last February's Washington celebration of the 20th anniversary of the Employment Act, Walter Heller, inventor of the doctrine of fiscal drag, and successful promoter of the 1964 tax cut, spoke in favor of suspending the investment tax credit-the 1962 tax boon to business investors which has the effect of reducing machine and equipment prices by 7 per cent...

...The after tax total of $44.5 billion was another all-time record...

...Of course this is the case...

...Thus some of the business forecasters who in February were predicting a 1966 Gross National Product (GNP) of $725 billion have jumped their projections another $10 billion...

...To say this is not to welcome the demise of price stability...

...Although interest rates continue to rise (banks are charging their best customers 5...

...Now, like their European counterparts, Americans will need to learn once more how to manage a labor force at very high levels of employment...

...This political truism may explain the Administration's present hesitancy to do so, and such official assurances as Secretary of the Treasury Henry Fowler's soothing remarks about the continued absence of inflation and the moderate tax increases that might at worst be proposed-at some later time...

...Their new $735 billion estimate amounts to a $59 billion increase over 1965, compared to the $48 billion rise between 196465, itself a spectacular achievement...

...It is a delicate operation to persuade the public that the same economic arguments which originally justified tax reductions now justify tax rises...

...The real alternative to higher taxes is reduced appropriations for schools, housing, community development, health research, War on Poverty, and urban demonstration projects...

...And deficits follow tax reductions no more surely than surpluses follow tax increases...

...Although given the political realities a portion of the tax burden inescapably will fall on low- and middle-income taxpayers, the portion should be as small as possible...

...Hence equity unites with the control of inflation to dictate tax changes which operate to diminish total investment, or at least the rate of its expansion...

...One danger, thus far resisted by the Administration is overreaction to the first serious inflation threat since the Eisenhower years...

...There is little question that the next 1 per cent of the labor force which is drawn into paid employment will be less skilled, less productive, and more difficult to handle than those already at work, but the proper approach is a new emphasis on public manpower programs for retraining and relocation, and a more serious effort by private employers to redefine jobs to suit the capacities of their new employes and to provide suitable on the job training...

...One of them is unnecessary unemployment...

...An election year is a bad time to propose tax increases...

...the last tax reductions have come into effect only recently...

...No doubt investment is in the long-run antiinflationary, since it increases plant capacity and enlarges ultimately the flow of consumer goods to their purchasers...

...More to the point is a substantial hike in corporate income tax rates and a rise in personal income tax assessments of a variety that restores at least some of the progressivity lost in recent legislation...

...But even a 3.5 per cent price increase will inevitably complicate our balance of payments situation, which for several years has been steadily improving, and will shatter an almost unprecedented five-year span of price stability during a sustained business cycle expansion...

...It is not astonishing that in 1965 profits increased some $9.9 billion over 1964 to a record $74.7 billion...

...In 1966 the poor are in the aggregate (state, local, and Federal imposts taken together) paying a larger share of the bill than they were in 1963...

...Their colleagues now, in much different economic circumstances, share that fear...

...Only last week, beer, cigarettes and newsprint all edged higher...

...What has happened is plain: Burns and Saulnier have feared inflation for some yearspractically since the current business expansion began...

...In fact, all the signs suggest that the American economy is entering a period of demand inflation-a time when the competition of government, business and consumers for scarce resources has the classic effect of rationing the resources among the most eager buyers by raising prices...

...Finally Paul Samuelson, long prominent in Democratic councils, has added his voice to the chorus in favor of credit tightening and tax increase...

...In January the President's Council of Economic Advisers bravely committed itself to the position that prices in 1966 need not increase by more than 1965's 2 per cent hike in wholesale levels and 1.7 per cent rise in consumer charges...

...This 1966 repetition of a tale familiar to students of inflation has caused a switch of opinion among the very economists who have had the most to do with the expansionary fiscal policies of the last five years...

...The control of inflation is not the only justification for higher taxes...

...February's unemployment figure of 3.7 per cent was the lowest in 13 years, startling enough to lead Business Week somewhat prematurely to describe our condition as one of full employment...

...If this request comes in the next few months, the Administration will almost certainly accompany it with a tax-rise program more meaningful than the practically painless combination of reimposed excises and rescheduled corporate and personal income tax payments which was all that Johnson sought in January...

...per cent), the demand for credit is unabated and funds for $60 billion of new investment are likely to be found...

...LESSON TWO IN MODERN ECONOMICS A Time for Taxes By Robert Lekachman In the two months that have elapsed since the President sent his budget and economic messages to Congress, near consensus has emerged about the direction of economic activity, the likely behavior of prices, and the requirements, if not the timing, of public policy...

...In fact, the British government, which presided over a 7 per cent price rise, enters a general election with excellent prospects of victory...

...Some economists shared this expectation two months ago...

...At present GNP levels, the annual value of the tax reductions enacted since February 1964 approximates $20 billion-the fruit of a veritable binge of tax cutting...

...Moreover, the Administration is to some degree the victim of its own past tactics: Tax slashes have been extensively merchandised as the only sovereign remedy for unemployment, idle factories, and inadequate rates of economic growth...

...It is simply to recall that there are worse horrors than moderate inflation...

...The arithmetic is far too ominous...

...force levels will rise from the 300,000 upon which the budget estimates were based to the 400,000 which the military seek, then the President will soon be asking Congress for another $5-10 billion...