Inflation, tax cuts, and politics
On Capitol Hill and elsewhere there is a growing consensus that Americans need a tax cut to pump new vitality into the nation's faltering economy. The key questions are: How soon, how large, and what kind of tax cut?
The Carter administration, the Federal Reserve Board, and the senior policy advisers to the last six presidents oppose an immediate tax cut "in the pressure cooker atmosphere of an election campaign," as Treasury Secretary Miller expressed it in congressional testimony this week. In the face of mounting political pressure from the Reagan campaign and from some Democrats in Congress to jump in with a tax cut now, the White House has adopted a sound strategy of holding off any tax reductions until after Jan. 1, 1981. In the competition between inflation and recession, the administration still sees inflation as the more serious long-term threat to the economy.
The sharp downturn in economic growth and the not unexpected rise in unemployment brought about by the recession are cause for concern and call for a measured, well-thought-out response -- not the political knee-jerk reaction more likely to come out of a heated election campaign. Recent opinion polls indicate that most Americans agree that inflation remains the nation's most pressing economic problem, despite recession. A Gallup poll of business leaders, conducted last month for the Wall Street Journal, found that the overriding majority of corporate executives also take this view. Business executives call the Federal Reserve's tight monetary policies correct -- but question whether the Fed will stick with them long enough to slow inflation.
The concern of those Democrats on the tax-writing House Ways and Means Committee who support the President's tax-cut timing is that Mr. Carter will not remain "strong, firm, and unequivocal" in resisting GOP pressure for an immediate cut. Most economists, including Governor Reagan's unofficial economic adviser, former Federal Reserve Board chairman Arthur Burns, caution that Mr. Reagan's proposed across-the-board 30 percent tax cuts over three years would feed inflation. They don't buy the Reagan argument that such cuts would spur economic growth enough to offset the inflation that might result. "It would be a great hoax on the American people," said Treasury Secretary Miller at this week's Ways and Means Committee hearings, to give them a pre-election tax cut and then have inflation take the money out of the other pocket.
A modest tax cut for individuals -- in the neighborhood of $15 billion -- would offset hikes in social security payroll taxes to take effect in January. This would keep the actual tax burden on individuals from getting any bigger. Carter strategists reportedly are thinking in terms of some relief for businesses as well -- via accelerated write-offs on buildings and equipment, or lower corporate income taxes.
Any such tax cuts next year will need to be accompanied by greater restraint in federal spending. This was evident in President Carter's mid-year economic review, which projected a $60.9 billion deficit in 1980 (the second largest in US history) and a $28.9 billion one for 1981. Nevertheless, some progress is being made in breaking the inflationary psychology, according to recent polls showing a marked increase in the number of Americans who believe there will be less inflation next year than there was last year. The inflation rate itself has showed signs of slowing somewhat; from 1979's 12.8 percent annual rate of increase to this year's projected 12 percent hike. But recent evidence is that 1981's expected improvement in the inflation rate will be less than previously expected.
Inflation, then, must remain the No. 1 target for now, which means delaying moderate tax cuts until next year. This may not look like the most politically popular route in an election year. But polls would seem to indicate that Americans recognize the hard choices that must be made and are willing to live with them. Politicians should be no less realistic.