Ford Climbs on the Tax-Cut Bandwagon

The drive to cut taxes in 1976 is be coming an irresistible force that not even a presidential veto could stop. At minimum, Congressmen facing re-election campaigns at a time when unemployment will still be high are certain to extend the $8 billion reduction in taxes on corporate and personal income enacted for 1975. All 20 members of Congress's Joint Economic Committee--liberal Democrats and conservative Republicans alike--have endorsed the idea; a tax-reform bill is due out of the House Ways and Means Committee by Oct. 28. Last week even President Ford apparently climbed aboard the bandwagon. He said that he too would favor tax cuts--if they were tied in some way to reductions in federal spending.

Ford's announcement came as a surprise to some of his top economic advisers. The President made his feelings known on the campaign trail in Oma ha, not in prepared remarks but in response to journalists' questions. He gave no hint of how big a tax cut he would accept, or what spending cuts he might insist on, and indicated that a combination of tax and spending reductions was only one of several plans under consideration.

In taking that stand, Ford clearly was heeding his political advisers, who have been urging him to grab what credit he can for easing the withholding bite on American paychecks. If this year's tax cuts are not extended, a typical worker will find his weekly paycheck reduced by $3 to $10 after Jan. 1. In fact the tax cut will have to be increased from about $8 billion to $12 billion a year to prevent even a slight rise in withholding rates. Reason: the cuts now in effect began May 1, so for 1975 twelve months of withholding-rates reductions were squeezed into eight months.

The Administration's economic policymakers are still widely split over the tax-cut issue. Some believe that a tax cut will only add to inflation by swelling the federal deficit for fiscal 1976; Congress has projected that a continuation of the tax cut would result in a $68.8 billion deficit. Others feel that the economy needs more stimulus and can handle it without overheating. Treasury Secretary William Simon and Council of Economic Advisers Chairman Alan Greenspan oppose a tax cut: they can be expected to argue with the President in favor of making the tax reduction as small, and spending slashes as large, as possible. On the other side, Secretary of Labor John Dunlop wants a cut large enough to keep withholding rates from going up on Jan. 1. He told the Senate Budget Committee last week: "A tax cut will act directly to maintain demand and increase employment."

Slower Pace. From the standpoint of the recovering economy, there is an argument for avoiding the shock of an increase in withholding rates. Beyond that, signals are mixed: they cry neither for nor against a bigger tax reduction.

National production may have grown at an annual rate approaching 10% in the third quarter--a solid rate for the beginning of recovery--but there are signs that the pace is slowing. The Commerce Department's index of twelve leading indicators was flat in August, ending five months of increase.

The Labor Department reported last week that unemployment inched down to 8.3% of the labor force in September, from 8.4% in August, continuing the slow reduction that economists have expected. A darker side to the figures: the number of workers jobless for 27 weeks or longer rose by 155,000 to a post-World War II high of 1.6 million.

The latest inflation figures are confusing.

The Wholesale Price Index in September climbed at a compound annual rate of 7.4%, or slightly less than in August.

But the figure may not be wholly trustworthy: key parts rose more rapidly than the index as a whole. Farm products and processed foods and feeds went up a disturbing 2.3% in August alone. The OPEC cartel has announced a price increase of 10% on crude oil, but there is speculation that the world oil glut will hold actual increases to less than that.

The issue now is how to maintain the pace without touching off a new inflationary spiral. Some liberal Democrats feel that merely extending current tax cuts will not be enough to maintain annual production growth at the desired level of 7% to 8%; they are calling for $8 billion to $10 billion a year more in cuts. Ford probably would not go along with that, unless Congress also agreed to sharp spending cuts in an election year--an unlikely prospect. In the end, the solution may well involve extension of this year's cuts with no offsetting action on federal spending.

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