A Tax-Cut Proposal

January 20, 1964

An $11 billion tax cut is being proposed in the face of a combined deficit for the fiscal years 1964 and 1965 until now officially estimated at $18.4 billion, and placed even by the new budget estimates at some $15 billion. We are borrowing money to cut taxes. The proposed tax cut is a fraud. Unless we are willing to slash expenditures we simply cannot afford at this time a tax cut in the sense of a tax reduction that would reduce revenues.

But we can afford tax reform. We can and should cut tax rates wherever these rates are so high that they actually diminish revenues. It is enormously probable that this applies to all personal-income-tax rates above 50 percent. All these rates together bring in about $1 billion, or less than 1 percent of our total annual Federal expenditures.

But if these rates were eliminated, and present tax progression stopped at 50 percent, the government would not lose this $1 billion. On the contrary (though, of course, no exact estimate is possible) there would probably be an increase in revenues from this change even in the first full year, and a much greater increase in succeeding years.

FOR A 50 PERCENT TOP

The reason is, of course, that taxpayers allowed to keep at least half of every additional dollar they earned (instead of only 47 cents or only 9 cents) would once more want to earn extra dollars that they now have no incentive to earn. Their production would increase. They would have not only a restored incentive to invest; they would have the funds to invest that are now siphoned into nonproductive government expenditure. And these increased investments would mean increased jobs, more productive and hence higher-paying jobs, and an increased rate of economic growth. Our frequently deplored slow rate of growth is mainly owing to our tax system—our excessive penalties on high incomes, profits, and capital gains.

Any tax rate above 50 percent is prima facie confiscatory. To abolish the confiscatory rates is, of course, politically the hardest thing to do. Politically the easiest thing to do is to cut the lowest rates still further—say from 20 percent down to 14 percent. But this would mean a tremendous loss of revenue, which with existing expenditures the government could not afford.

What would be possible, however, with only slight loss of revenue, would be to abolish the jump from 20 to 22 percent in the rate on taxable incomes (for single persons) between $2,000 and $4,000. This would not only reduce the overall average rate on incomes in this bracket, but on all incomes in brackets above it.

THE GREAT ILLUSION

There are now altogether 24 different tax rates in our graduated income tax. Halting the progression at 50 percent would wipe out fifteen of these discriminatory rates, reducing them to a total of nine. If, in addition, the new tax law were to abolish the 22 percent bracket (and extend the 20 percent bracket) in the first year, and then in the next six years abolish successively the 26, 30, 34, 38, 43 and 47 percent brackets, with the government meanwhile keeping expenditures under control, the country at the end of that time would be left with only two tax brackets—of 20 and 50 percent respectively. It could then decide whether it wanted to keep the higher penalty rate.

Perhaps the greatest harm done by the progressive income tax, particularly the existing steep graduation, has been to create the illusion that a rich minority of “fat cats” are paying the bill. That this is an illusion should be plain. The basic 20 percent rate brings in 87 percent of the entire revenue from the present income tax. It has been calculated, in fact, that a flat income tax of 23½ percent, with present exemptions, would bring in all the revenue now brought in by the whole scale of graduated levies from 20 up to 91 percent.

If there were a flat proportionate tax, each of us would realize that he, and not “the other fellow,” was paying his share of our huge Federal expenditures. Not until enough of us recognize this truth will there be any hope of holding those expenditures within reasonable bounds.