Here Comes The Tax Cut

Deferring some "reforms " and dallying on Burns

If Jimmy Carter were Santa Claus, the American business community would be asking him for two Christmas gifts. One is a tax cut to stimulate profits, investment and employment. The other is the appointment of an inflation-fighting conservative to head the Federal Reserve Board, preferably the patriarchal incumbent, Arthur F. Burns. Last week the President went halfway; he promised to call for a tax cut in 1978. But the future of the Fed chairmanship remained a tantalizing question.

At his press conference, Carter said that "in 1978, there will be substantial tax reductions and combined with that will be an adequate proposal for tax reform." Unfortunately, he felt compelled to add that the tax reform would be "comprehensive." That only muddied the waters, for many a businessman concluded that meant the President would persist in his hopes to eliminate or sharply reduce preferential tax treatment for capital gains, and a number of other benefits.

White House aides say that the President has not abandoned these positions but is likely to defer the most controversial "reforms," presumably until after the 1978 elections. The plan for next year will probably include more modest changes in the tax code, along with tax cuts designed to boost business confidence, prod capital spending and give a timely kick to the economy in order to prevent the slowdown that many experts have predicted for the second half of 1978.

The day after the press conference, Assistant Treasury Secretary Laurence Woodworth outlined the tax reductions that the White House is expected to request. The package will amount to at least $20 billion a year, and a third of that will go for business tax relief. The 48% corporate tax rate will be reduced--perhaps to 46%. The White House is also considering making the 10% investment tax credit permanent; it is due to revert to 7% beginning in 1981.

Woodworth added that there would be some tax relief for "everyone at every income level," though it is estimated low-income groups will get the biggest breaks. The plan to reduce the maximum tax on personal income from 70% all the way down to 50% may be put off. The White House apparently figures the revenue is still needed because there probably will not be steeper taxes on capital gains.

Nothing unnerves businessmen more than the Carter proposal to toughen the treatment of capital gains, and tax them at the same rates as salary income. Such a change would further hamper capital investment, which is crucial to economic progress and job creation. This centerpiece of the tax program is the most likely to be deferred. Yet Carter will probably attempt to raise taxes on income earned abroad by subsidiaries of U.S. corporations and on export earnings of companies that set up domestic international sales corporations. He may try to pare deductions for gasoline taxes, sales taxes and medical expenses. He has shown no sign yet of backing down from his effort to dry up the celebrated "three-martini" business lunch by forbidding at least part of it to be deducted.

For months, the President has been urged not only by business but also by Democratic leaders in Congress to alter his tax plans. Al Ullman, the House Ways and Means chairman, has been pleading with Carter for a "minimalist" rather than a "maximalist" tax bill. He warned the President not to heed the arguments of White House hard-liners on reform. House Speaker Tip O'Neill was equally emphatic. The only way to get a tax bill through Congress, he insisted, was to put tax reduction ahead of reform--and separate them. If the two elements were joined, O'Neill said, a bill would not be passed for at least several months--too late to help the economy in 1978 or, parenthetically, to aid Democrats in getting reelected. A quickie tax cut, he felt, could sail through Congress by mid-February.

Along with the prospects of a tax cut, the other prop for business confidence is Federal Reserve Chairman Burns. Under Burns' management, it is true, the money supply for the past year has bounced up and down erratically, and has generally increased at a rate that most conservative monetarists consider to be too inflationary. Nevertheless, many businessmen fear that if Burns is not reappointed, the money spigot may be turned on even more fully. Says Gabriel Hauge, chairman of New York's Manufacturers Hanover Trust Co.: "The key to a long life for this expansion is a sustainable pace, and to that end policymakers must resist the temptation to speed up the expansion by sharply intensifying monetary and fiscal stimuli. Continuing the tenure of the present chairman of the Federal Reserve Board would be a wise move by President Carter."

Burns, who is 73, has made clear he wants to keep his job, and lately he has gone out of his way to speak well of the President. Though he has criticized Carter's energy, Social Security and tax-reform proposals, he gave the President a cordial pat on the back in a speech last week. Carter, said Burns, "fully appreciates the importance of substantially lessening the psychological and financial obstacles to business investment. I anticipate that decisions in Washington will at last reduce uncertainty, improve the state of business confidence and encourage capital formation."

Carter is giving no hints as to whether he will return the compliment by re-appointing Burns when his four-year term as chairman expires in two months. The White House staff is virtually unanimous in wanting Burns to go; Democratic Party leaders are just as insistent. But Carter knows that his freedom of choice is limited if he does not want to shake business psychology. Even if he chose to dump Burns, he most likely would pick not a liberal but a moderate or conservative to administer the nation's supply of cash and credit. Among the choices being discussed this week by White House aides:

> Robert V. Roosa, 59, a partner in the investment banking house of Brown Brothers Harriman & Co. An early supporter of Carter, Roosa gained renown as an innovator in international finance when he served as Treasury Under Secretary for Monetary Affairs from 1961 to 1964.

> Paul A. Volcker, 50, president of the New York Federal Reserve Bank and vice chairman of the Fed's powerful Open Market Committee. A Democrat who was Treasury Under Secretary for Monetary Affairs during the Nixon Administration, Volcker is considered a bit too much of a monetarist by some of the Keynesian economists around Carter.

> Bruce K. MacLaury, 46, former president of the Minneapolis Federal Reserve Bank and a nominal Republican, who is now head of the Brookings Institution, the largely Democratic think tank.

More remote candidates include Andrew Brimmer, 51, a black who was a governor of the Fed from 1966 to 1974 and is now a private economic consultant in Washington; Daniel Brill, 59, Carter's Assistant Secretary of the Treasury for economic policy; Economist Henry Kaufman, 50, a partner of Salomon Brothers; and Hauge, 63, President Eisenhower's Administrative Assistant for Economic Affairs.

Whether Burns stays will depend to a large extent on the President's reading of the economic and political climate. If indicators are encouraging and his energy program is emerging in acceptable shape from Congress, he would feel freer to let Burns go. If the outlook is less ebullient, he might well want to keep Burns --and not rock the boat. qed

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