Growing Pressure

More than that of most nations, the history of the U.S. is studded with controversies over taxation, from the Boston Tea Party of 1773 to the rocky advent of the graduated income tax in 1913. Last week taxes were once more a large and bristly national issue--but the controversy this time was only among those who wanted the same thing in differing ways. Across the U.S., pressure and sentiment were growing on every front for a tax cut to spur the sluggish U.S. economy.

The U.S. Chamber of Commerce and left-leaning Americans for Democratic Action seldom agree on anything--but they were together for a tax cut. On Capitol Hill, Minnesota's Democratic Senator Hubert H. Humphrey, fighting for an immediate slash, was joined by two Republican colleagues, Kentucky's John Sherman Cooper and New Jersey's Clifford Case. At the conference of state Governors in Hershey, Pa., New York's Nelson Rockefeller, California's Pat Brown and Ohio's Michael Di Salle--all running for re-election this fall--added their voices to the chorus. Within the Administration itself, the President's own Council of Economic Advisers kept pressing for immediate and substantial reductions. The fever spread to the press, inspiring countless editorials and cartoons. The New York Mirror topped a cut-taxes edi torial with the headline: NOW, NOW, NOW!

The Big Question. The proponents of quick tax cuts to get the economy moving were powerfully backed up by expert eco nomic opinion. Fortnight ago, three dozen highly regarded economists from outside Government assembled in Washington to discuss tax reductions with Treasury Secretary Douglas Dillon and his top officials. The economists agreed to a man that the state of the economy demanded them --not next year, but as soon as possible. Says University of California Economist Neil H. Jacoby: "There is general agreement among economists that federal tax rates must come down. The big question is whether there will ever be a better time to do it than now. I hope President Kennedy acts soon."

For Kennedy, the key word seemed to be "if" -- he has repeatedly said that he would cut taxes if he thought that the economy really needed such action. Last week at his press conference, he repeated that the Administration was planning "a tax cut and tax reform next year and we, of course, would prefer to maintain that schedule." But he promised again to keep a close watch on "the basic indicators of the economy," and sounded what seemed to many to be a hint of the future by stressing that demands for a tax cut from both business and labor "should be very seriously considered."

Vague Ideal. Behind Kennedy's reluctance to cut taxes this year stand the urgings of Treasury Secretary Dillon, the only Republican in the Cabinet. Dillon feels that a quick cut this year would wreck the Administration's plans for broad reform next year. Treasury experts have been working on the outlines of a reform bill for more than a year. Under present plans, cuts in rates under the reform bill would be steep enough so that the measure would bring overall tax reductions--but some taxpayers now benefiting heavily from special provisions might find themselves owing more income tax rather than less as a result of the bill's loophole-closing provisions.

Nobody opposes tax reform as a vague, abstract ideal, but when it comes to actually abolishing or reducing particular deductions, a real-life tax reform bill would stir up fierce opposition--not just from oilmen who benefit from depletion allowances, but from homeowners who deduct mortgage interest, elderly people who are allowed double exemptions, stockholders whose first $50 of dividend income is tax exempt, executives who take part of their compensation in stock-purchase options. To soothe the inevitable outcries, Dillon wants to coat the reform pill with rate-reduction sugar when the bill is ready next year.

Sabotaged Goal. The Administration thus finds itself in a quandary: if it fails to cut taxes soon, it may face charges of inaction in combating economic sluggishness; if it does cut taxes soon, it may sabotage its admirable goal of reforming away some of the complexities and inequities of the present tax law, which a top-level New York investment banker calls "a bunch of warts piled upon warts, boils piled upon boils." One reason the Treasury does not have its tax reform bill in shape now is that it has lost so much time trying to push through Congress a scrappy tax-revision bill that would 1) give business firms a special tax credit on capital outlays for equipment, and 2) balance this revenue loss with various controversial devices, including withholding on interest and dividends. The bill passed the House, but now lies stalled in Harry Byrd's Senate Finance Committee. Byrd, who opposes a tax cut because he thinks a further Government deficit would be irresponsible, is determined to block the withholding provision, and he probably can.

The betting in Washington is that, in election year 1962. pressures for an early tax cut will prevail. But even among those who favor it, there is considerable controversy about just what kind it should be. Administration thinking now leans toward restricting any reduction to individual income taxes on the theory that it would stimulate increased spending and have a quickening effect on business. Besides, the Administration seems to feel that business will get its share of tax reduction from the tax credit pending in Senator Byrd's Finance Committee and from the long-promised revised depreciation schedule, now at the printer's, that would permit business firms to write off the costs of equipment over a shorter span of years and thereby reduce their corporation tax payments by a total of about $1.2 billion a year.

$1 a Week. Many economists, both at universities and in business, urge cuts in corporation as well as individual tax rates. They consider both to be abnormally high, believe they have thus helped to retard the economy's growth potential. Says William Butler, economist for New York's Chase Manhattan Bank: "I think a cut in the corporation tax would have a greater stimulating effect than cuts in individual taxes." Many feel that a cut in corporate taxes alone is politically unfeasible. But is it? The main trouble with the economy does not lie with consumer spending, which remains high, but with lagging investment, profits and expansion. Even the labor unions realize that jobs for their members depend on expanding industry. A tax cut that would spur that expansion by easing the profit squeeze and increasing investment thus should logically be acceptable to all, since it would help labor as well as industry.

Economists also disagree with the Administration on the magnitude of a tax cut needed to stimulate the economy, feel that it would have to be substantial to do any good. The U.S. Chamber of Commerce suggested a $7.5 billion tax-cut package, and various economists have called for totals ranging from $5 billion to $10 billion. The Administration is thinking along the lines of paring two points in each individual tax bracket, which would reduce each taxpayer's load by 2% of his taxable income, for a total of about $4 billion. For a factory worker making $100 a week and paying $520 a year in federal taxes (about average), the saving would come to $1 a week.

Would a tax cut really do any good? Most economists feel, for one thing, that it would have a favorable psychological impact, would restore public confidence. Corporate tax cuts take a while to show up in increased activity, to be sure, but they usually result in solid advances. And the past history of sudden consumer windfalls, such as Eisenhower's tax cut in 1954 or occasional veterans' bonuses, shows that the money goes quickly into the economy: 80% of the additional money is spent, only 20% saved. Furthermore, a tax cut would be likely to give the stock market a boost.

During July and August the Administration will be peering at the economic indicators in hopes that a lift in the economy will make a quick tax cut unnecessary. But the first statistics announced after the President's press conference looked unpromising: unemployment, after holding steady for a few months, rose slightly in June, from 5.4% to 5.5% of the labor force after adjustments for seasonal factors. If the statistics that unfold during the next several weeks are no more encouraging than that, the Administration may feel compelled to call for quick tax cuts, even if it means leaving the tax structure unreformed--warts, boils and all.

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