Tax Cut Regardless?

December 30, 1963

So the stage is all set for a tax cut of $11 billion in the calendar year 1964, and everyone seems delighted. No one in official circles any longer mentions the obsolete idea that the budget ought to be balanced. No one has so far indicated, in fact, that the deficit will be any less than the $9.2 billion that Secretary Dillon estimated about two months ago for the 1964 fiscal year, or the $9.2 billion that he estimated for the 1965 fiscal year.

So, at best, we are borrowing money to cut taxes. This does not look like a very farsighted operation. But the situation is graver than this. If the government proposed to finance its planned deficits by borrowing real savings, at least it would not be resorting to inflation. But the most vociferous proponents of a tax cut want it precisely because they do want it financed by inflation—i.e., through the creation of new money. And the Federal Reserve authorities have already begun to supply this inflation. The nation’s “money supply” in the official sense (demand deposits and currency outside banks) increased $6 billion between October 1962 and October this year. In a broader sense (including time deposits) the money supply increased $20.7 billion in that period, or 8.6 percent. This is an extraordinary increase for a single year. This, rather than the mere anticipation of a tax cut, has triggered the boom in the stock market and business.

WHY IT IS A SHAM

If Federal expenditures are allowed to run $9 billion beyond revenues, the difference must somehow be paid for. And if it is made up by inflation—i.e., by the government’s creating more money—this means that it is being paid for by a hidden tax, an iniquitous tax paid through higher prices. A tax cut at the cost of a deficit is a fraud.

Apart from the question whether there should be a tax cut at all at this time (without an even greater cut in expenditures to balance the budget), the kind of tax cut now proposed is far from the most likely to increase incentives and promote growth. What is most necessary to this end is to reduce the near-confiscatory rates on the higher incomes, and penalization of effort and success. But the tax bill as it passed the House does the reverse. By establishing a minimum standard deduction, it frees 1.5 million taxpayers from all tax liability. This must tend to remove the interest of that many more people in prudent fiscal management by the government, and increase the pressure for benefits they do not directly pay for.

TO RESTORE INCENTIVE

The House version of the new tax bill would make our income-tax structure even more steeply graduated than it already is. The percentage of reduction in the aggregate tax liability of various income brackets (as pointed out in the illuminating testimony before the Senate Finance Committee by Roger A. Freeman of the Hoover Institute at Stanford University) would run like this:

But what is needed to increase what President Kennedy called “the financial incentives for personal effort, investment, and risk-taking” is, most of all, reduction of the near-confiscatory rates on the higher incomes. As Roger Freeman rightly declares: “Government should not hold a majority interest in anybody’s income, and the top rate of the personal income tax should not exceed 50 percent.” The vote of the Senate Finance Committee to give a few taxpayers in unusual situations (it is estimated it would affect only 14,000) the option of limiting their maximum tax rate on personal incomes to 50 percent, is a debatable step toward this goal; but it is at least an encouraging recognition that present confiscatory rates have been destroying effort and incentives without producing revenue.