The Shape of the Cut

After seven months' gestation period, the House Ways and Means Committee last week gave birth to an $11.1 billion tax cut. A bulky, 310-page bill with the formal designation of H.R. 8363, the measure should reach the House floor by the middle of next week. Under its provisions, individual income taxes will drop by $8.8 billion and corporation taxes by $2.3 billion, with two-thirds of the reduction to take effect next year, and the rest in 1965.

The vote to send the measure to the House floor was 17 to 8, with two Republicans joining Ways and Means' 15 Democrats in approving it. But there was more of a struggle than the vote would indicate. With federal expenses running close to $100 billion a year and the national debt above $300 billion, many businessmen and politicians argued that cutting taxes without a parallel reduction in spending was the height of fiscal irresponsibility. Among the critics was Dwight Eisenhower, who said last week that he supported a tax cut "only if the persistent and frightening increase in federal expenditures is halted in its tracks."

A Game of Chance. Leading spokesman on the Ways and Means Committee for that view was ranking Republican John Byrnes of Wisconsin, a tax expert, who argues that "the 'Puritan ethic' is a lot stronger in this country than some people think." Applying the Puritan ethic to the tax bill, Byrnes offered an amendment that would have prevented the second stage of the tax cut from taking effect on schedule in 1965 unless Kennedy met two conditions beforehand: limiting his fiscal 1965 budget to $98 billion--$800 million under the present budget; and keeping the net national debt below $303 billion by next June 30 (the Treasury Department estimates that the debt will hit $304.2 billion by then).

To Kennedy, the imposition of such restrictions came "very close to resting the national economic welfare on a game of chance." Addressing the "Business Committee for Tax Reduction in 1963," a group formed at the Administration's urging and including such big names as Henry Ford II, David Rockefeller and Frederic Donner, Kennedy said Byrnes's rider would inhibit rather than stimulate investment, thus nullifying the purpose of the tax cut. "This nation," he said, "has had a recession on the average of every 42 months since the second World War--or every 44 months since the first World War. By January, it will have been 44 months since the last recession began. Prompt enactment of this bill will make the most of the antirecession thrust that this tax cut can provide." Despite the President's argument, Ways and Means came within a hair of approving Byrnes's amendment. It was voted down, 12 to 11, with two conservative Democrats abstaining--less, apparently, out of personal conviction than out of party loyalty.

A Break for Boxers. As it finally emerged from committee, the bill was a considerably shrunken version of the President's original tax program. He had proposed cuts amounting to $13.6 billion and structural reforms that would have increased tax revenues by $3.4 billion. Ways and Means approved reforms in the tax structure that will net only $600 million in new revenues.

As the bill now stands, individual rates will drop from a range of 20-91% to a range of 14-70%, while corporate taxes will go down from 52% to 48%. Under a new formula allowing everyone to claim a standard deduction of $300 plus $100 for each dependent (in place of the present maximum standard deduction of 10% of taxable income up to $1,000), some 1,500,000 low-income Americans will be dropped from the federal tax rolls. A number of other, smaller groups also got breaks. Authors, prizefighters, and others who have one fat income year after several lean ones will be allowed to average out their earnings over a five-year period so as to achieve a far lower tax rate. Art lovers who buy paintings, hang them in their homes, but claim a deduction by promising to donate them to museums, will be allowed to continue doing so.

Coupled with the reductions are a spate of revenue-increasing provisions. Taxpayers, under the Ways and Means version of the bill, will no longer be allowed to deduct state and local gas, cigarette and liquor taxes. Although stockholders will be allowed to exclude the first $100 of dividend income from taxable income instead of the first $50--a break for small stockholders--the rule allowing them to subtract 4% of the remaining income was repealed. Tax exemptions will not be permitted for the first 30 days of sick pay or the first $100 of casualty losses. The executive with stock options--under which he is entitled to buy his company's shares at a specified price, often considerably below the market price--will now be required to pay heavy short-term profits taxes on the sale of such stock unless he hangs onto it for at least three years; if he is offered the stock at below-market prices, he will also have to pay a penalty tax on any profits.

Fits on the Floor. When the bill reaches the House floor, it will be treated under a "closed rule" barring floor amendments and limiting debate to two days. Even so, says Byrnes, "we will give them fits on the floor." Once voting begins, Byrnes can move to recommit the bill to Ways and Means to reconsider his "Puritan ethic" amendment. But the Administration is counting on mustering enough votes to defeat such a motion and send the bill on to the Senate.

There, the bill faces rough going. It will first be entrusted to Conservative Democrat Harry Byrd, chairman of the 17-member Finance Committee and a renowned foe of high Government spending. Byrd could easily stretch out hearings for two months, and further delays are possible if the Senate becomes embroiled in a civil rights filibuster. Finally, changes must be worked out in a House-Senate conference. Kennedy wants the first stage of the bill to go into effect by Jan. 1, 1964, assuring that the full impact of the tax cut would be felt in an election year. But the chances of final action by that date are growing increasingly remote.

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