Catechism on Taxes

July 2, 1962

Do we need a tax cut now? Yes. Why? Because the burden of taxation on investment is excessive and undermines incentives. Also, because of the stock-market collapse, a tax cut now is psychologically important.

What taxes should be cut? How much? Those taxes should be cut that most discourage production and investment. We should begin with corporation taxes. First, we should abandon the ill-advised proposals to discriminate against American business investments abroad. For an immediate positive stimulus, a depreciation write-off of, say, 35 percent should be allowed on all investments in the first year, with short total write-off periods. The corporate income tax of 52 percent should be kept only on earnings retained in the business. What a corporation pays out in dividends should be taxed at a lower rate—to begin with, not more than 50 percent. This lower tax on earnings paid out as dividends could be a substitute for the present complex personal $50 allowance and 4 percent credit on dividends.

How much would these reductions reduce government revenues? In the first year or two, perhaps a little. In subsequent years, not at all. They would increase government revenues by their incentives to new income- producing investment, employment, and production.

CUT SPENDING TOO

Would such tax cuts be enough to give the stimulus needed? No; but they are the best possible until real slashes are made in the huge proposed government spending of $92.5 billion in fiscal 1963 ($115 billion counting social security). For the following fiscal year, given a few moderate spending cuts, corporate tax rates might be dropped to 50 percent for retained earnings and to 45 percent for earnings paid out in dividends.

What about personal taxes? Income taxes ought to stop right now at a top rate of 65 percent, instead of soaring to a confiscatory 91 percent.

Wouldn’t that lose revenue? It would probably increase revenue, even in the first year; and certainly in later years. Even if the top rates stopped at 50 percent, the government would lose, at most, a hypothetical amount of less than $1 billion, which is what it now spends in three or four days. In fact, however, even if top rates on personal incomes (keeping other brackets unchanged) stopped at 50 percent, there would be a long-run increase in government revenues—and a dramatic increase in investment and production.

But what about personal income taxes on the lower brackets? It is desirable to reduce tax rates all down the line; but lower rates on lower and middle incomes would mean a very heavy loss in revenues. Such tax cuts are possible only by heavy cuts in government spending.

REAL INFLATION THREAT

With our huge defense needs, are such spending cuts possible? Easily. More than half of our planned $115 billion spending for fiscal 1963 is for non-defense items. To slash foreign aid, farm price supports, etc., would strengthen our economy.

Isn’t the real need now to cut taxes on lower and middle incomes to give a big fillip to “purchasing power”? No; that would only lead to bigger deficits and inflation.

But isn’t the whole inflation danger over, as so many people are now writing and saying? No. With a $7 billion deficit in the fiscal year just ending, and with an increase of $16 billion in money and deposits in the last twelve months, plus the prospect of a further big deficit in 1963, the danger of more inflation is very real.

What of the drop in the stock market, and steady commodity prices? In the midst of every inflation (even the tremendous German inflation of 1923–24) there are occasional violent breaks in the stock market, because speculative guesses of the exact extent and pace of an inflation are constantly changing. The wholesale price index is held down for technical reasons that would take long to explain. But consumer prices have mounted to new high levels this year.

What is the most serious threat of renewed inflation today? Precisely the false assumption that “the danger of inflation is over” and that the country needs another shot in the arm.