Deficits Are Poison

March 14, 1955

President Eisenhower was thoroughly justified when he called the Democratic proposal to cut everybody’s income tax by $20 (plus $20 more for each dependent) “the height of fiscal irresponsibility.”

This is in effect the same proposal Democratic leaders made a year ago to raise everybody’s personal-income exemption by $100. It has all the disadvantages of that former proposal. The deficit for the current fiscal year is estimated at $4.5 billion; for 1956 the deficit is already estimated (optimistically) at $2.4 billion. This $20 cut proposal would raise the annual revenue loss by $2.1 to $2.3 billion more. Hardly less serious, it would relieve some 5 million more voters of the necessity of paying any income tax at all, and so relieve them of any concern about governmental extravagance by fostering in them the illusion that “the other fellow” was paying the bill.

What makes this proposal even more irresponsible is that it was tacked on as a rider to a bill designed to maintain excise and corporation tax rates, so that revenues from them would not fall by $2.8 billion a year. The Democrats said in effect to the President: “If you want to keep this $2.8 billion of revenue we will charge you $2.3 billion for the privilege.”

This was demagogy outsmarting itself. Even should the rider be passed by Congress in some form, it is politically easy for the President to veto it. He would stand, at worst, to lose only about $500 million net in revenues. And economically this would be in every way a better tax cut than the one the Democrats proposed. A cut in the excise taxes would stimulate sales. A cut in the onerous corporation taxes would stimulate investments that create jobs. And Mr. Eisenhower could accompany his veto with a reiterated demand that Congress pass his tax-maintenance proposal in its original form. If the Democrats refused to do so, they would find themselves bearing the onus of “favoring the big corporations.”

But how did Mr. Eisenhower get into this difficulty in the first place? By abandoning the goal of his State of the Union message two years ago: “The first order of business is the elimination of the annual deficit.” When he abandoned that, he lost his anchor and was himself adrift. At his press conference of Feb. 23 he gave an excellent description of the kind of proposal the Democrats had made. It would mean inflation. “Whenever you have inflation, the immediate effect is to hurt first the people of fixed incomes, white collar workers . . . the person who lays aside savings in the forms of pensions, insurance plans, and savings bonds. . . . Now we are going back to deficit spending, the most insidious thing that can happen to a free economy.”

True words; well spoken. But, alas, Mr. Eisenhower has himself never got out of deficit spending. He has allowed himself to be led astray by the Keynesian and New Deal doctrines of a “compensated economy,” which treat an annually balanced budget as a minor and even a dubious objective. He has himself proposed huge new spending programs. This leaves him no firm ground on which to stand against the fiscal demagogy of the Democrats. He can hope to combat it only by submitting a completely balanced budget—and for 1956.

My comment in Newsweek of March 8,1954, on the Democratic proposal for an increase of $100 in all income-tax exemptions would cover the present situation with hardly a change even in the figures: “President Eisenhower can successfully combat this demagogy, irresponsibility, and inflation only if he takes a solid stand on principle. He cannot hold the line if he merely tries to stick by his January budget. He cannot convincingly argue that a deficit of $2.9 billion is all right but a deficit of $5.2 billion is all wrong. He can succeed only if he stands on the firm economic and political principle that the budget must be fully balanced, and now. And then he can demand of any group in Congress that wants the fun of cutting taxes that it first of all cut expenditures by the same amount. The only alternative to this course is economic and political demoralization.”