a new Road to a Stable Economy
ULMER, MELVILLE J.
a new Road to a Stable Economy by MELVILLE J. ULMER For many months a gulf of misunderstanding and a certain unfortunate stubbornness has separated those in Washington who believe taxes should...
...Other resistance comes from numerous elements of diverse political hues including many—and perhaps the majority—of Mills' colleagues in the House, a substantial number of members of the upper chamber, led by SenMELVILLE J. ULAAER is a professor of economics at the University of Maryland and an economic consultant to the Bureau of the Budget...
...Indeed, in their insistence that this is the only feasible way to check inflation, the economic advisers to the White House threaten to transform the New Economics into a New Orthodoxy...
...Some members of ADA, and others too, reject the tax because they reject the war in Vietnam...
...By the logic of the New Economics, a tax reduction was required and was duly pressed by the Council of Economic Advisers...
...It is not fitting that they flutter moodily with the ever-changing tides of business...
...Nevertheless, while serious unemployment persisted, nearly four years passed before the tax cut was enacted, and it took another six months before it began to take effect...
...The principal arguments of those in opposition may be briefly summarized.There is the forcefully presented contentionof Chairman Mills that public spending should be cut first...
...But unlike tax changes, they would not alter the permanent incomes of either consumers or business...
...In the judgment of ADA, a tax in-increase now, before closing the loopholes, would have regressive tendencies...
...Indeed, by the time it yielded its full effects, much of the need for a tax cut already had diminished...
...The Council of Economic Advisers agreed...
...Compulsory loans would be paid into the fund by taxpayers when inflation threatened...
...His new book, "The Welfare State: U.S.A./7 will be published by Houghton Mifflin in the spring...
...Any reasonable economies, in this view, would be preferable to increasing the tax burden...
...Neither the war against poverty nor income tax rates should fluctuate from year to year...
...Instead, the President and his advisers suspect that economies will be at the expense of the Great Society, already battered...
...At the same time, Americans for Democratic Action oppose the Administration on the grounds that the tax burden, under present statutes, is not heavy enough on some sectors of the population...
...There is also no question that the ten per cent surcharge on income taxes, which the Administration has proposed, would do much to retard or halt the inflation...
...The Administration's answer, of course, is that when the votes are taken these are the items that will not be cut...
...It should also, therefore, be more palatable to Congress...
...But the compulsory loan plan is not offered here as a clever subterfuge calculated to temper the squeamishness of vote-conscious Congressmen...
...Furthermore, taxes exercise an important influence on the distribution of income, as well as on economic decisions, and these should reflect the long-term decisions of the electorate...
...Exclusive reliance has been placed on tax changes, both under Heller and those who followed him in the Council under President Johnson...
...They point to loopholes such as the oil depletion allowances and trust fund dodges that have enabled some millionaires to escape paying any Federal income taxes whatever...
...In the same way, a persistent imbalance in the other direction would signal the need for a tax cut...
...This will reinforce purchasing power, enlarge demand, and snap the economy back to full employment...
...The proposal is motivated by the conviction that the stabilization program thus far dictated by the New Economics is fundamentally mistaken, and that its errors would be corrected by a systematic plan for compulsory loans and repayments...
...There has been some evidence of prospective weakness in business investment and also a perceptible sluggishness in consumer expenditures...
...In favor of the increase are President Johnson, his economic advisers, and the many influential friends and followers of the latter in the academic community...
...Heller, by now back at the University of Minnesota, called promptly for a tax increase...
...Thus, a business investment that had been undertaken on the promise of a ten per cent yield would still hold the same promise whether a compulsory loan had been added to the regular corporation income tax or not...
...When inflation threatens, taxes should be increased...
...Stability Stipends ? But whatever it is called, with President Johnson and Representative Mills eyeball to eyeball over the tax increase, the compulsory loan plan could perform a significant immediate service...
...Yet, by contracting or expanding the income currently available for spending, compulsory loans and repayments would affect the expenditures of households and business much as tax changes would...
...But these would be deliberate, carefully-planned adjustments in tax rates that would occur rarely...
...It is primarily on these grounds that the plan for compulsory loans is offered here...
...No doubt a Madison Avenue technician could think of a more seductive label for the compulsory loan plan...
...In contrast, a substantial tax boost could transform a once profitable project into a failure...
...The theory, almost all agree, is impeccable...
...Indeed, the volume of public spending, as well as the taxes that finance them, ought to be geared to the long term economic requirements of balanced growth, equity, and a conscious, reasoned decision concerning the division of resources between private goods and public services...
...He writes here in a private, unofficial capacity...
...The swift, push-button changes needed for stabilization would be effected through the mechanism of compulsory loans and repayments...
...MELVILLE J. ULMER is a professor of economics at the University of Maryland and an economic consultant to the Bureau of the Budget...
...Guaranteed Refundable Contributions...
...But before pursuing further the possible weaknesses of tax changes as a stabilizing device, I propose a possible alternative —a plan that I believe would block inflation promptly if it develops, and yet meet the objections of those who oppose the Administration's tax increase...
...It could enable each to draw back a few feet, in honor—and at the same time stop inflation...
...He writes here in a private, unofficial capacity...
...Now, nearly two years later, prices are mounting and there still has been no action...
...Meanwhile, as politicians and technicians talk on, prices keep rising...
...His new book, "The Welfare State: U.S.A.," will be published by Houghton Mifflin in the spring...
...It is a view that probably wins support from most middle-class families receiving income mainly from wages or salaries...
...The very diversity and intensity of the opposition suggest that something may be wrong with their proposal...
...In the same way, the case for closing tax loopholes could be urged on the proper grounds of equity and morality...
...As a permanent measure, it would involve establishment of a trust fund, or "stabilization kitty...
...Nevertheless it would be hasty, and I think wrong, to conclude that therefore taxes ought to be increased...
...If in the long run it appeared that repeated loans were necessary and payments into the stabilization fund greatly exceeded current payouts, it would signify that an increase in taxes was required to finance government operations and economic growth...
...A more rational approach to taxation and spending may then be possible...
...As a permanent fixture, the compulsory loan plan would remove tax increases or reductions, and public spending as well, from the emotionally-charged arena in which hastily considered decisions are demanded to meet the immediate emergencies of excessive unemployment or inflation...
...In support of this position, Senator Proxmire has pointed out such "low priority" items in the Federal budget as the heavy public investment in supersonic transport, the space program, the maintenance of superfluous troops in Europe, and the notorious "pork barrel" appropriations for the Corps of Engineers, highways, and some other non-defense public works...
...Taken together, they represent a formidable opposition—not formidable enough to deny the danger of inflation, or the need to check it, but to question whether the technique proposed by the Administration is the proper one for the task...
...None of the arguments against the tax increase is completely pointless, and some bear considerable substance...
...The proposal presented here is that each taxpayer be required to lend the Government an amount equal to ten per cent of his tax liability, the sum to be repaid with five per cent cumulative interest at the end of three years...
...Granted that economic forecasts have often been wrong, it would be foolhardy to shrug off the prediction of the President's Council of Economic Advisers that prices will rise even more sharply in the year ahead...
...This will reduce the nation's spending, diminish excessive demand, and dampen the rise in prices...
...For example, the elimination of wasteful items in the Federal budget could be debated on its merits, relieved of the irrelevant requirements of economic stabilization...
...If by that time business activity were turning down, the tax change would only accelerate the decline...
...Foremost in opposition is Representative Wilbur Mills, the Arkansas Democrat who is chairman of the House Ways and Means Committee...
...To give them their due, politicians seem to sense instinctively that taxes are too important an economic matter to be jiggled frequently and capriciously...
...Finally, there is the fear, shared by some economists, that the forecast of the Council of Economic Advisers may be wrong...
...Loans would be tantamount to forced savings—assets which would grow with interest (five per cent cumulative), and which Would surely become liquid in three years or sooner...
...When recession threatens, the New Economics proclaimed, taxes should be cut...
...As a loan with interest, however, it would be less punishing to the taxpayer...
...Therefore, the long term financial plans of both, so important for personal security as well as stable economic growth, would be unaffected...
...The latter is the basic question raised in this article, and it is also raised implicitly by some of the Administration's critics...
...Stability in their accounts would be next to impossible with frequent and unforeseeable changes in the rules of the game...
...payouts would be made to them within three years on each loan, or sooner if the economy became slack...
...In the last year and a half the consumer price index increased by five per cent, and in the most recent months its pace stepped up ominously...
...Business plans its investments on prospective yields figured after taxes...
...Federal Savings Allowances...
...Along with this emphasis on cutting expenditures is the conviction that the American public is already as heavily taxed as it ought to be—a belief that is pervasive and perhaps most influential of all in Congress...
...In my opinion, delays in enacting tax changes, which have always been prolonged ones, are inherent not merely in the legislative process, but in the basic requirements for reasonable stability in business and household planning...
...He has served as an economic adviser to the General Services Administration and the Departments of State, Labor, and Commerce under the Truman, Kennedy, and Johnson Administrations...
...a new Road to a Stable Economy by MELVILLE J. ULMER For many months a gulf of misunderstanding and a certain unfortunate stubbornness has separated those in Washington who believe taxes should be increased from the many more who believe that they should not...
...Its failures are evident even in the last seven years during which the New Economics held full sway...
...ator William Proxmire, chairman of the Joint Economic Committee, a variety of both liberal and conservative economists, and Americans for Democratic Action...
...Certainly, as the year 1965 came to a close prices were surging forward, the Vietnam war was escalating, and inflation instead of unemployment was the problem—at least as viewed from Washington...
...Ever since 1961, when Walter Heller became chairman of President Kennedy's Council of Economic Advisers, the official position toward economic stabilization has been the same...
...Loans for National Progress...
...Thus, when President Kennedy took office in January, 1961, fully seven per cent of the labor force was unemployed...
...The loan would appear, initially, as a surcharge on tax liability, and would have much the same deflationary impact on the nation's spending as an outright increase in taxes...
...One wonders, are Presidents and legislators simply "ornery" or dull, or may there not be some legitimate reason why they hesitate to move taxes swiftly up and down like an office building elevator...
...Even a swiftly enacted tax increase could not have much effect sooner than six months from now...
...But despite the fanfare over alleged successes, a hard look at the facts reveals that in practice it has never worked...
...He has served as an economic adviser to the General Services Administration and the Departments of State, Labor, and Commerce under the Truman, Kennedy, and Johnson Administrations...
...Households of necessity shape their spending, and assume mortgage payments and other commitments, on the basis of their expected incomes after taxes...
...they would appear as both surcharges and credits in the ordinary income tax schedules...
...In case the business situation changed suddenly, the President would have authority to make repayment at any earlier date...
...Although loans would reduce immediate purchasing power, and repayments would expand it, unlike taxes they would not alter the fundamental financial positions of businesses or households...
...Within limits set by Congress, the President would be authorized to order loans or early repayments at his discretion...
Vol. 31 • December 1967 • No. 12
