How to Help the Poor

March 4, 1963

On the argument that it will put zip in the economy and reduce or wipe out unemployment, the President and his advisers are planning to increase spending and cut taxes, and so bring about a budget deficit for the next fiscal year of some $12 billion. On the argument that it will help “the little fellow,” as well as increase “mass purchasing power,” the biggest tax slashes are to be made on incomes of $3,000 or less and the smallest percentage cuts on the largest incomes. As, in addition, nearly a million low-bracket taxpayers are to be removed from the tax rolls altogether, the net effect will be to increase tax discrimination against those who earn the higher incomes.

Let us assume that neither of these proposals is designed for mere vote-catching, but is made with perfect sincerity. It is nonetheless true that both of them rest on flagrant economic fallacies. Budget deficits would hurt, not help, workers and people with low incomes. Punitive taxation on people with higher incomes, and limitation or disallowance of honest deductions (stigmatized as “loopholes”) must also hurt, not help, workers with low incomes.

INFLATION IS A TAX

Cutting taxes on low incomes, at the cost of a huge budget deficit, will not increase the purchasing power of low-income groups. For if the deficit is financed by borrowing from the banks and increasing the money supply (as it almost inevitably will be), it will create inflation. It will drive up prices. And the higher prices will eat up any increase in nominal dollar purchasing power. The lower-income groups will not be able to buy any more with their increased supply of depreciated dollars than they could with fewer but better dollars. Their “increased purchasing power” will fade away.

Equally fallacious is the idea that budget deficits create prosperity and increase employment. They do mean inflation. They do raise prices. But they can increase employment only to the extent that they lower real wages—i.e., only to the extent that the rise in prices is not offset by an equal or greater increase in wage rates. Any prosperity brought by inflation is at best evanescent. It can be kept going only by greater and greater doses of inflation.

The belief that deficits cure unemployment got a crushing refutation in the ’30s, when for ten years an average annual deficit equivalent to $19.7 billion today (as a percentage of GNP) was accompanied by average unemployment of 18.6 percent of the labor force.

DON’T PUNISH SUCCESS

Punitive taxation of corporations and of high-income earners also hurts workers and low-income earners. For whatever hurts profits and capital accumulation, whatever discourages saving and investment, means fewer jobs, makes labor less productive, and makes real wages lower than they otherwise would be. Again and again in the last year the Administration has deplored whatever hurts “initiative, risk-taking, and effort.” But its spending and tax recommendations bear little relation to this verbal concern.

A program that would truly help workers and other low-income groups would be almost the exact opposite of the one the Administration is proposing. It would slash spending enough to balance the budget at present revenue levels. For it would recognize that all expenditures have to be paid in one way or another; that a deficit is paid for by inflation; and that inflation is a peculiarly vicious form of tax, falling most heavily on workers.

A program truly designed to help wage-earners would terminate the punitive tax rates on high incomes. It would slash such rates immediately to a top level of 50 percent, on the ground that anything above that is prima facie confiscatory and a profound discouragement to initiative, effort, risk-taking, capital accumulation, saving, and the investment that increases employment, productivity, and real wages. For the same reason it would mitigate estate taxes, capital-gains taxes, and double taxation of dividends.

In brief, it would halt all punitive policies and approve a tax program to maximize production.