December 15, 1976

To Cut Taxes, Or Not To Cut Taxes?

That is the question.

"Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous fortune; or to take arms against a sea of troubles and, by opposing, end them."

Jimmy Carter might be pondering this parody of William Shakespeare as he moves toward his first major decision as President of the United States:

Whether to sit tight and allow the slow process of private enterprise to correct our national fortune, or to take bold action to fix things in a hurry at the risk of long range disaster.

There is no question that we are in a slow moving economy.  It has been variously termed, "down turn," "mini-recession," "slide," and "slump."  During the recent political campaign even the word "depression" was loosely bandied about.

None of these are semantically correct for the economy continues to inch forward sluggishly at a rate of about one percent annually.  This is considered inadequate by all the experts who then disagree widely as to the desired or possible rate.

A three percent increase in the Gross National Product used to be thought normal.  Today, a figure twice that is touted by some Keynesian theorists.

A high-powered delegation of industrial giants called on Carter last week urging a tax cut to stimulate purchases of consumer goods.  They came away from their meeting "encouraged" that Carter would go for their plan of a 19 percent cut in taxes for those making less than $20,000 a year, and a 4 percent cut for those making more than the base amount.  The plan is a compromise to forestall a tax increase for the high bracket wage earner.

Alarmed, House Speaker Thomas P. O'Neill rushed to Carter to caution a "go-slow" approach to tax cuts.  He advised a program of federal spending instead.

Both sides seemed to agree on one thing - it is not wise to cut taxes AND increase government spending This, in itself, is encouraging.  Attempts by past presidents to do both have contributed substantially to our present predicament.

O'Neill says he is less than enthusiastic about a tax cut "in view of the reports that 60 percent of the last tax cut went into the banks of America."

Here we come to the nub of the problem.

Those in the higher income brackets, having paid for basic necessities, save some of their money.  Less affluent workers have to spend most of their income for living expenses.

O'Neill sees something sinister about putting money in banks.  His implication is that the rich bankers sit on the money and get fat doing nothing.

This is demagoguery at its worst.

Saved money - whether in banks, saving and loan institutions, credit unions, insurance, or industrial stocks - is loaned back into the economy to build new homes, new farms, new oil wells, new factories, new machines.  The result is a recycled economy, in contrast to one that is wearing out.

The only money that becomes a burden to society is that buried in somebody's back yard, or purloined by the government.

It used to be that taxes were levied to pay the bills of government, and many people still believe this myth.

When the world-wide Great Depression of the 30's shook confidence in capitalism, the English economist John Maynard Keynes popularized a "redistribution of wealth" through taxation.  Now many governments - including the United States - levy taxes more with the intention of controlling the economy than in paying expenses.

The theory is that you force "dead money" out of financial shelters for a wealthy few into a higher standard of living for the poor masses.  Those with "ability to pay" are taxed heavily to move money from long-range capital investments into short-range consumer spending.

The immediate effects of such Keynesian policies certainly are quickly noticed.  The national economy booms as idle machines and workers rush to meet the demand for shoes, clothes, frozen dinners, television sets, furniture, automobiles and similar products quickly used up, but high on the poor man's shopping list.

Unnoticed in the rosy glow of a busy economy is the wearing out of the machines used in such production.  The saved money normally used for new machinery disappears into our trash heaps.  The "seed" for an industrial economy is eaten up.

Great Britain - where the theory was born and reared - now teeters on the brink of bankruptcy.  British industry is obsolete and unable to replace its worn out production machinery because Keynesian taxes wiped out savings for investment.

British leaders, including the Labor Party, just last month began to point out the necessity of producing more and of attracting working capital.  Unfortunately, the workers shun sacrifice and the banks have no saved money to lend.

Carter undoubtedly has had the problem spelled out for him in great detail.  Yet, he has campaign promises to keep to the blacks, ethnics, unions and big cities.

The pool of saved money needed for capital investments is already dangerously low.  The greatest shortage in the world today is not food, nor oil, nor housing.  It is capital.  Japan, West Germany and the Arab nations are accumulating capital.  The United States rate of capital accumulation is slowing down.

The choice between "ease demanded", and "investment required" is a tough one for Carter.

Government really can't afford a general tax reduction.  And a selective adjustment that penalizes one economic group at, the expense of another is a dangerous risk.

On balance, across-the-board tax relief would be the best answer if it is coupled with an equal reduction in government spending.  It would, at least, take away some of the itch of Congress to spend our way to prosperity.

Author: Lindsey Williams