The Missing $11 Billion

March 16, 1964

The House passed the $11.5 billion tax cut by the overwhelming vote of 326 to 83, and the Senate by 74 to 19. The President hailed the cut as “the single most important step that we have taken to strengthen our economy since World War II. . . . It will immediately increase the income of millions of our citizens,” he continued, “by reducing the amount of taxes that you must pay. . . . By releasing millions of dollars into the private economy it will encourage the growth and prosperity of this land that we love. . . . ”

But if it’s as easy as all that, a question that may occur to some is: why did we stop at an $11.5 billion cut? Why not omit taxes altogether?

But let’s confine our attention to the situation as the government presents it. It estimates that in the “administrative” budget there will be a combined deficit in the current fiscal year and in 1965 of $15 billion, and that in the “consolidated” budget (reflecting the entire receipts from and payments to the public) there will be a combined deficit for the two fiscal years of $11.2 billion. In other words, for these two fiscal years combined, the government will take in from the public a total of $234.2 billion, but in the same period it will spend a total of $245.4 billion, or $11.2 billion more.

FROM WHERE?

Where do the people who are so jubilant about the tax cut imagine that this $11.2 billion is going to come from?

As the government won’t get it from taxes, there are only two other ways in which it can get it. First, it can sell bonds to the public that the public can pay for out of its real savings. But to the extent that it does this: (1) There will be no increase in “purchasing power,” because the people that buy the bonds will lose that amount of purchasing power for other things, just as if they had turned it over in taxes. (2) If the government takes $11 billion out of the funds available for investment, either private business will be able to borrow just that much less for its own expansion and investment, or everybody will have to offer higher interest rates to tempt more lending and investment.

But the net effect of this might be deflationary. And the President has declared: “It would be self-defeating to cancel the stimulus of tax reduction by tightening money.” We must conclude, then, that the government intends to get the missing $11 billion by, in effect, printing it.

WILL IT BE PRINTED?

The process is indirect. The government sells its I.O.U.’s—bonds, certificates, notes, bills—to the banks The banks “pay” for these by creating deposit credits on their books against which the government can draw checks. The people to whom it makes payments—defense contractors, veterans, farmers, or its own military or civilian employees—then transfer these credits to their own accounts or ask for cash, and the required amount of new (Federal Reserve note) cash is printed.

But how can printing more paper money increase production and employment? It may do so temporarily wherever wage rates have been too high to permit workable profit margins or where labor costs have forced prices higher than the existing supply of monetary purchasing power can support. In either case, however, a readjustment of price-wage relationships could restore full employment just as well. And if labor costs are allowed to rise as fast as or even faster than prices, even with the new money, unemployment will continue nonetheless.

So if the $11 billion gap between revenues and expenditures is met out of new money, that money will raise prices. Americans will pay a hidden $11 billion tax through a lower purchasing power of their dollars.

It is a dangerous game for the government to play. The prospect of continued deficits will undermine world confidence in the dollar. If we try to keep interest rates down by an easy-money policy (with the Bank of England discount rate now raised to 5 percent) still more dollars may flow abroad and cause a further drain on our gold supply. We cannot “strengthen our economy” by weakening the dollar.