Phony Tax Cut

February 24, 1964

By a vote of 77 to 21 the Senate has passed substantially the same tax-cut bill as that passed by the House in September. So the country is certain to have a new tax law, bad in almost every respect.

A tax cut of $11 billion, accompanied by a sufficient slash in spending to ensure a balanced budget, would have been a genuine stimulus to long-run economic growth. But the present tax cut is a fraud on its face. It is enacted in a fiscal year when the Treasury already expects a deficit of $10 billion, and looks forward to another deficit in the next year of $5 billion. So we are borrowing to cut taxes.

The tax cut may turn out to be deceptive in a double sense. It is called a tax cut of more than $11 billion. Yet in the face of this, the Treasury blandly estimates that tax revenues will be $4.6 billion greater in fiscal 1965, when the cut is fully effective, than in 1964, and $6.6 billion greater than in fiscal 1963.

The theory is that the tax cut itself will make us so prosperous that even the revenues will increase. This would no doubt have been possible if the confiscatory and unproductive tax rates above 50 percent in the higher brackets had been cut down to that level. But the slash is mainly in the lower tax brackets. It reduces the aggregate tax liability by an average of 19 percent. It reduces the tax liability of persons in the lowest bracket by 38 percent.

IMPLAUSIBLE ESTIMATE

It would take an average increase in taxable incomes of more than 20 percent to realize the Treasury’s estimate of higher income-tax revenues. That is just not plausible. If it were achieved in dollar terms through inflation, government spending would increase correspondingly. The 1965 deficit may be nearer to $10 billion than to $5 billion.

There would have been some compensation if the tax cut had been accompanied by real tax reform—if the burdens on production had been lightened; if the punitive income-tax rates above 50 percent had been abolished; if the one-sided capital-gains tax and the double taxation of corporate dividends had been mitigated. Instead, by reducing the already lower rates much more percentagewise than the higher rates, the scale of graduation has been made even steeper. Even the mere token dividend credit of 4 percent (far lower than that of Canada or Great Britain) has been abolished. Though corporation tax rates have been reduced, the reduction is offset by advanced collections.

SOAK THE RICH

Thus a shortsighted soak-the-rich and penalize-the-productive philosophy has prevailed, even though it will stunt our economic growth, and slow down the increase in capital accumulation and investment upon which a nation must depend for all improvement in economic conditions, for any increase in real wages, and for any permanent success in a war against poverty.

In so far as there is any theory behind the tax cut except how to win the coming election, it is an extreme and discredited Keynesianism. It is the theory that the way to increase prosperity and employment is to increase “consumer spending.” If you cut taxes, so the theory goes, consumers will have more to spend, and business, selling more, will provide more jobs. What this overlooks is that our unemployment is the result of excessive wage rates and labor costs in some lines as compared with productivity. So if wage demands go up as much as prices, the unemployment will remain.

When government expenditures are higher than revenues, the difference must somehow be paid for. If the deficit is met by selling bonds to savers, the government will absorb the investment funds that would normally be used by business. What the advocates of the tax cut are really depending on, therefore, is that the difference will be paid for by newly printed paper money. This will further raise prices, lower the purchasing power of the taxpayers’ remaining money, reduce world confidence in the dollar, and increase the “balance of payments” crisis about which the Administration professes to be so concerned.