What's in the Package

To tax and to please, said Edmund Burke, is no more possible than to love and be wise. That aphorism applied in the U.S. last week as the 10% federal income tax surcharge went into effect after months of acrimony between the President and Congress. It had long been widely acknowledged that a tax increase was necessary to stifle inflation. The White House excepted, agreement was fairly general that a sizable cutback in government spending was also in order. A $6 billion cut was the congressional price for the tax bill, and both came to pass. The question last week was whether the combination would do what it was meant to do.

For 62 million wage earners subject to withholding, last week's paychecks reflected an extra 10% tax on the tax they had already been paying. Because the surtax is retroactive to April 1 for individuals, some will discover at income tax filing that they have to pay more than has been deducted. Those who normally receive a refund will find the Government check is smaller. Since it will cover only nine months, the surtax for the full calendar year 1968 will be 7.5%. Corporations get the full treatment. For them, the retroactivity extends back to Jan. 1.

"A modest and equitable temporary income tax is far better," said Lyndon Johnson last month when he signed the surtax bill, "than the cruel and haphazard tax of rising prices and spiraling interest rates." Most concerned about how the tax-and-spending package emerged are the President's economic advisers. What they originally proposed was a tax surcharge only; for them, the spending downhold that Congress insisted on came as a jolt. The combination seemed like a jet pilot applying full flaps at the same time he throttles back. What worries the Council of Economic Advisers is, first, whether the mixture will slow the economy too abruptly, and second, whether there is reserve power to be applied in mid-1969 when, projections indicate, the economy will need to be revved up again. The situation, said Warren Smith, the CEA's newest member, "calls for a very sophisticated use of fiscal and monetary policy that has never been attempted before."

Even without a surcharge, the economy in some ways had been tapering off on its own. Retail sales have leveled off since March, and inventories have gone up as a result. For the second quarter of 1968, the gross national product--the sum total of everything produced in the U.S.--rose $19.6 billion rather than the $20 billion to $22 billion that had been estimated. Government economists, believing that the economy is malleable, intend to take it from there. Once the surtax has cooled off the inflationary situation, Washington experts intend to heat up the economy again.

Easier Loans. The first area that they intend to work in is housing. Surging since the beginning of the year because of demand and in spite of higher interest rates, new-home starts slipped in May by 16%, fell even further in June. To make it easier to obtain housing money and thereby induce more people to buy houses, the Federal Home Loan Bank Board last week ordered a change. The board reduced the required liquidity for savings and loan associations from 7% to 61%; this means that S & Ls need keep $600 million less in reserves and will have that much more to lend on homes. The Administration also hopes that the Federal Reserve Board, by jiggering interest rates, will make mortgages more attractive to insurance companies, which have been investing money in long-term bonds that give better yields.

No matter how much economists slide-rule the economy, many imponderables remain. One is the U.S. corporation and how it will respond to another swerve in policy. The surtax will have some bad effects for companies: it will cut into corporate profits and decrease spending for improvements. At the same time, the new tax ought to make some change in the tenor of company-union relations. Up to now, when labor negotiations are fiercer than usual, the advantage has been with labor. With full employment and rising prices, unions have been able to negotiate contracts with an average increase of 5% or 6% in wages. The surtax may change this. Economists estimate that one effect will be to in crease unemployment from 3.5% of the labor force to about 4.5%; this is because companies faced with higher taxes will recoup by hiring fewer new workers. Downholds on employment, together with more stable prices, will give unions less of a base to bargain from. Another imponderable is the consumer: he is presently saving money at the high rate of 7% of disposable income. Economists speculate that, with the tax increase," he will reduce saving but continue to spend. In a study released by Commercial Credit Co., University of Michigan Professor Paul W. McCracken estimated that the average American is in a mood to spend, should increase his buying of durable goods by 8% in spite of tax increases.

This file is automatically generated by a robot program, so reader's discretion is required.