How We Choke Incentive

February 18, 1963

The President’s special message to Congress on tax reduction and “reform” rests on a network of outworn economic fallacies. Its basic assumption is that the way to reduce unemployment and increase economic growth is to cut the tax rates on the lower income groups and to squirt more “purchasing power” into the economy through huge government spending and huge deficits.

The truth is that enactment of the President’s program would bring on inflation and imperil the dollar as a world currency. There is no reason to suppose that it would either reduce unemployment or promote economic growth. Unemployment is caused by discoordination of the wage-price system. As long as unions are granted their present powers to extort wage rates beyond the level of marginal labor productivity, they will perpetuate and increase unemployment in the very face of inflation. So far as economic growth is concerned, it can be promoted only by policies less hostile to profits, risk-taking, success, and investment. Only encouragement to investment can raise wages.

PENALIZING SUCCESS

Most of the tax cuts recommended by the President are not calculated to encourage business or employment to expand. They increase, rather than diminish, the incentive-stifling progression in the tax-rate schedule. As the President himself points out: “The overall savings are proportionately highest at the lower end of the income scale”—nearly 40 percent for those with incomes of less than $3,000, and less than 10 percent for those with incomes in excess of $50,000. And the so-called “reforms” largely take back whatever relief the tax-rate cuts do give to the middle and upper income level taxpayer.

As one investment house (Aubrey G. Lanston & Co., New York City) bitterly puts it: “As far as individuals are concerned, the plums in this tax package would go to the person who doesn’t own his own home; doesn’t save and provide capital to American industry through stock ownership; doesn’t carry his proportionate share of the support of our churches, hospitals, colleges, and charitable causes; doesn’t pay much in taxes to support city schools and other local services and to pay for state government; and doesn’t happen to fall into ill health. Nearly l million taxpayers would be removed from the tax rolls, in fact, to vote themselves greater future benefits without even the need to fill out and turn in a nominal tax return.”

A 50 PERCENT TOP

With a few exceptions the “reforms” recommended by the President would make income-tax paying more unfair as between different taxpayers rather than less. The exceptions are the proposal to allow an indefinite carryover of capital losses, the proposal to remove the present limit on deductions for catastrophic medical expenses, and the proposal to permit those who receive widely fluctuating amounts of income from year to year to average them out for tax-rate purposes. This last reform would be much less necessary if it were not for our steeply graduated tax-rate schedule—particularly the rates over 50 percent.

The proper course for Congress would be to concentrate on slashing nondefense expenditures, to balance the budget at present tax levels, and to postpone the whole “tax reduction” program as such. It is true, as the President concedes, that our present tax burden “reduces the incentive for risk, investment, and effort thereby aborting our recoveries and stifling our national growth rate.” But the way to reduce it is to slash the spending that makes it necessary, not to invite deficits and inflation.

While waiting for the appropriation committees to do this, revenue-raising committees of Congress might well go ahead now with tax reforms but real reforms, designed to maintain revenues while reducing deterrents to economic growth. There is room to mention only one such reform here. Slash all income-tax rates above 50 percent to that level. All these rates together bring in less than $1 billion a year, or less than 1 percent of what the government spends. Yet it is impossible to estimate how much they choke incentive and discourage investment.