Abnormal Econ 101

In January of 1969, just before President Nixon took office, the retiring Secretary of the Treasury, Joseph W. Barr, warned Congress of a potential “taxpayer’s revolt” fueled by an increasing public awareness of existing tax inequities. Barr pointed out that middle-income taxpayers bore the brunt of taxation, while many in the higher brackets escaped their fair share of the burden and some paid no taxes at all.In response, Congress passed the Tax Reform Act of 1969. it was effective, but not effective enough….Tax exemptions serve a useful purpose, for example to spur the sale of state and municipal bonds and to stimulate business, but if not carefully held in check, exemptions result in gross inequities…. It is unacceptable that the ordinary wage earner should pay a greater percentage of taxes than those with enormously higher incomes.

The value-added tax is a kind of national sales levy widely applied in Western Europe.It has some attractive advantages. It is both a way to raise large revenues for the government and a device to give domestic industries an edge over their foreign competitors.However, there is considerable doubt that the value-added tax would be appropriate for American conditions…. Value-added taxes are directly reflected in higher costs of living, and it would be foolish to impose such a tax now when inflation is already a serious problem. And unless special steps are taken, a value-added tax works a hardship on low-income families in the same way conventional sales taxes do.

Few professional economists will quarrel with President Nixon’s assertion that another large deficit in the federal budget is unavoidable, if there is to be any real hope of reducing unemployment and rejuvenating the economy….What has to worry reasonable men, though, is whether the deficit can actually be held even to that level — and whether, in any event, pump-priming of this magnitude can be carried off without perpetuating both inflation and wage-price controls….President Nixon, who came into office expounding the virtues of a balanced budget, confessed a year ago that under the pressure of necessity he had become a believer in Keynesian economics…. He became the first President, let alone the first Republican President, to squarely embrace the notion of a “full employment budget” to explain and justify the need for a very large deficit.The idea is that a budget should be considered “balanced” if expenditures do not exceed the revenues which would be collected if the economy were healthy enough to produce substantially full employment… The principle, we believe, is basically sound. Unfortunately, however, there is room for skepticism about how it will work out in the real world.

Nobody should begrudge a square deal for the 27 million Americans who are on Social Security…however, the politicians have a tendency to forget — especially in an election year — that the millions of wage and salary earners who pay for Social Security through payroll deductions are entitled to consideration, too….Experts say that management of the Social Security fund is unnecessarily conservative. By making some simple changes in the actuarial assumptions under which the program is financed, a major portion of anticipated increases in Social security deductions could be safely canceled.

The House Ways and Means Committee is pressuring the Nixon Administration to come forward with tax reform proposals before the end of spring. Actually, the committee has its hands full on other matters; it isn’t really prepared to undertake a new overhaul of the tax laws in this election years. Next year, however, may be a different matter…. And whenever there is talk about tax reform, the oil industry inevitably comes in for prominent mention because of the substantial tax benefits which it enjoys….Surely, less generous treatment is called for. Again, however, the possible consequences of corrective action must be understood in advance.Higher tax bills will be passed on, at least in part, to the consumer. And to the extent that foreign production is made economically less attractive, the companies will tend to try to drill and produce more oil in the Santa Barbara channel….

The IRS says it has been steadily simplifying income tax returns and it may be right, but for many people the instructions might as well be written in Albanian…. The mysteries of the tax form, of course, reflect the bewildering intricacies and confusion of our tax laws…. By all means let the IRS crack down on tax fraud. But by all means, too, let the government do something about the mess it has made with tax laws that permit this fraud.

[T]he record is spotty with regard to prices and profits. Both are exceeding the Phase 2 guidelines in some companies within some industries. And profits, generally, are still going up.Such a situation cannot be lightly accepted without jeopardizing the whole wage-price stabilization program.If the Administration is to succeed in its efforts to break the back of inflation, excessive wage settlements must be avoided. But wage earners cannot be expected to accept restraints on their pay, unless prices and profits are curbed, too.But back to tax reform. On June 7, the board was cynical, and was speaking about a theme that we return to in today’s editorial — the need for measurements of whether fiscal policies are meeting their stated goals:There is a lot of talk, in this election year, about closing so-called tax loopholes — and properly so. Experience shows, however, that when Congress tries to write tax legislation in a highly charged political atmosphere, it is more likely to open new loopholes than close old ones….Although the fact is sometimes overlooked by campaign orators, most tax preferences or “loopholes” were enacted in the first place as the result of sincere efforts to make the tax laws more equitable or to accomplish certain desirable social and economic goals.The trouble is that once loopholes find their way into the tax laws, Congress rarely gets around to reviewing them to see whether they are indeed accomplishing their intended purposes….And that tax revolt The Times warned about? By June 26, it was on: [Nixon] added that “tax reform cannot be a cover for a tax increase.”It isn’t quite that simple. In fact it will be hard to avoid some kind of federal tax increase, perhaps a big one, whether or not tax reform advances from rhetoric to reality….It will surprise a lot of people to learn that defense outlays, expressed in terms of constant dollars, are less than a billion dollars higher than a decade ago. In the same 10 years, however, spending for federal social programs has soared from $30 billion to $110 billion….the American people as a whole have not much insisted that their politicians use the pruning shears in the larger public interest. So, the current tax rebellion notwithstanding, higher taxes are almost certainly on the way. And the revolt was only going to get worse if Social Security grew costlier, the board added on July 3:There is no question that the 20% increase in Social Security benefits which was approved by Congress Friday will be welcome news indeed to millions….There is also no question, however, that the pain of paying for the higher benefits is going to be felt very sharply when Social Security payroll deductions go up next year….One result will be, as Mr. Nixon pointed out, to wipe out the benefits of the 1969 reductions in the federal income tax for millions of people in middle-income brackets. Another effect will be to add further fuel to the taxpayers’ revolt, thereby squeezing even further the resources available to carry out other worthwhile but expensive social programs. Revolt or no, The Times wasn’t about to go in for pie-in-the-sky tax-increase-free reform plans, as it made clear on Aug. 6: [McGovern’s tax reform proposals] suggested an innocence, disturbing in a presidential candidate, of how the American economic system actually works.There is nothing wrong with the South Dakotan’s basic position that the gap between rich and poor in this country is far too wide — and that if elected he will try to do something about it….However, it is wrong for politicians to suggest, as McGovern insists on suggesting, that soak-the-rich tax reform offers a magic way of financing expensive new spending programs without the painful necessity of raising taxes on ordinary, middle-income Americans….There is nothing sacrosanct about any given level of corporate taxation. But it should be kept in mind that corporations are abstractions, and their tax bills are ultimately paid by flesh-and-blood people — most of whom are by no means rich. And on Aug. 31, The Times asked the democratic candidate for president to quit bothering “the businessmen”:It is hard to argue with McGovern’s basic point that it doesn’t seem fair for Americans who work for a living to get less favorable tax treatment than people who make their money from stock market profits or land investments. The fact is, however, that the principle of lower taxation on capital gains is woven deeply into our economic system….Maybe the businessmen are wrong. On the other hand, maybe they’re right. We should try to find out before tinkering too much with a system that has been an integral part of the world’s most successful economy. But when the Republican presidential candidate joined in with his own unfeasible reform, The Times chastised him on Sep. 11:President Nixon, apparently determined not to be out-promised by Sen. George S. McGovern, has let it be known that if he is reelected he will not seek a federal tax increase at any time during his final four years in office.It is an unrealistic promise, as the confusion and obfuscation which attended the most recent voicing of the pledge plainly shows…. The tax rebellion being what it is, neither candidate has the courage to face the issue squarely….Although some major spending programs can and should be reduced, the country faces a host of problems which cannot be solved cheaply. Higher spending will be required in such fields as pollution control, mass transit, education and reconversion programs for the aerospace industry….[D]espite disclaimers, the Administration is thinking in terms of a value-added tax…it seems obvious that people who do not own their homes would be stuck with a heavy new tax without any assurance that the corresponding cuts in property taxes would be passed on to them in lower rents. Thus the Price Commission’s tough new posture is in the best interests of the nation and, for that matter, of the business community itself. As long, that is, as toughness is combined with a common-sense recognition of the fact that in dealing with prices and profits, just as in the case of wages, special situations arise which merit special treatment.