Sham Tax Cut

September 2, 1963

Neither the Treasury nor the House Ways and Means Committee that adopted its proposed tax cuts has any reason to feel proud of what it did.

Let us recall some elementary principles that everyone seems to want to forget. Taxes are imposed, not out of pure cussedness, but to raise revenues. Their function is to raise enough revenues to pay for the government’s expenditures. Taxes, in other words, are a purely derivative problem. The real problem is to cut expenditures. But nobody wants to face this. So everybody can be a cheap Santa Claus by voting for tax cuts while voting for more expenditures.

When taxes fall short of meeting expenditures, the tax cut is not real. Either visible taxes must be correspondingly increased in subsequent years (if there is any honest intention of ever having even a “cyclically” balanced budget or ever paying off any of the national debt), or the deficit must be paid for by the hidden tax of inflation, i.e., of higher prices and cheaper dollars. If inflation worked out evenly, it would be a proportional income tax and capital levy on rich and poor alike. It never works out evenly, but falls most heavily on those least able to protect themselves. In brief, any tax cut that leaves a deficit is a deception and a sham.

HUGE DEFICITS

On Aug. 13, Secretary Dillon predicted a deficit of $9.1 billion for the current fiscal year 1964, compared with his estimate in January of $11.9 billion. But he also forecast still another deficit of $9.4 billion for fiscal 1965. The day after the Secretary announced these tremendous deficits, the Ways and Means Committee adopted tax cuts, starting in the election year that begins next January, that will amount when fully effective, according to Treasury estimates, to $11.9 billion annually. How much of this cut was allowed for in Secretary Dillon’s estimates of the day before was not clear. In any case the Treasury, this far ahead, has persistently underestimated the deficit. For the fiscal year ended June 30 last, it originally estimated a surplus. There was actually a deficit of $6.2 billion.

The same thing happened in the preceding fiscal year, which ended with a deficit of $6.3 billion.

If a tax cut were justified at all with present spending programs, it would not be the kind of tax cut that the Treasury has recommended and the Ways and Means Committee adopted. There would be an argument for a tax cut that ended confiscatory rates, that made the scale of progression less steep, that mitigated the taxes that do most to discourage effort, production, and growth. Such reforms would make possible greater revenues in spite of lower rates.

MASSIVE REVENUE LOSS

But the new tax bill does the opposite. For the present personal income tax scale ranging from 20 to 91 percent, it substitutes a scale ranging from 14 to 70 percent. The result is that the tax cut at the bottom of the scale amounts to 30 percent and at the upper end of the scale varies from about 15 to 23 percent. Moreover, owing to a new “minimum standard deduction” gimmick, 1.5 million taxpayers would be taken off the tax rolls entirely.

The result is that 1.5 million fewer people will give a hoot how high government spending goes. The loss of revenue will be massive. It will be politically almost impossible to put these people back on the rolls or to restore the 20 percent basic rate. If, as Congressman Bruce Alger of Texas proposed, there had been simply a flat tax cut of 20 percent all down the line, the political problem of restoration would not be so serious. If the top rates had been slashed to a maximum of 50 percent, there would have been a maximum revenue loss of $1 billion in the first year and probably increased revenues in succeeding years because of the incentives that would have been restored. Instead, the penalization of investment was made even steeper by the proposed termination of the 4 percent dividend credit.

True, the new tax bill has a few good features. But in the context of planned deficits of more than $9 billion a year, its tax reductions are a fraud that will deceive only the shortsighted.