What Kind of Tax Cuts?

October 10, 1955

Reports have been leaking out of Washington that the Republicans plan to vote for a cut in taxes whether or not the budget is balanced. One report is that they are even seriously considering an increase of $100 in the personal income tax exemption.

Such reports, if true, would be profoundly discouraging. There should be no tax cut at all unless and until the budget is not only balanced but shows a prospective surplus from which the tax cut could be taken. We are now facing the 23rd deficit in the last 26 years. If we cannot balance the budget at the very peak of prosperity, how can we ever hope to balance it at all? A planned deficit is a planned inflation. Inflation is the most unjust of all taxes.

If a tax cut is now possible, it certainly should not be made by increasing personal income tax exemptions by $100. It is impossible to believe that the President himself ever seriously considered this. It is precisely the proposal the Democrats brought forward in the spring of 1954. At that time Mr. Eisenhower made a courageous and statesmanlike TV talk exposing the transparent demagogic character of the proposal. It would remove about 5 million people from the necessity of paying any income tax at all. It would thereby foster in them the dangerous illusion that “the other fellow” was paying the bill. And it would cost the government some $2.5 billion in annual revenue. This is not much different from the proposal made by the Democrats this spring for a $20 cut in everybody’s income tax. Mr. Eisenhower correctly called that scheme “the height of fiscal irresponsibility.”

If any tax cuts are possible now, they should be made first of all at two points where any “practical” politician would consider it suicidal to suggest them. There should be a cut in the corporation income tax rate and a cut in the confiscatory rates on the highest personal income brackets.

Congress actually voted several years ago to reduce the corporate income tax rate from 52 percent to 47 percent. But it has been voting to postpone this cut from year to year; and the reduction is now being treated as out of the question. Yet a cut in the corporate income tax from 52 percent to 50 percent would mean a cut in revenues of only about $85 million.

If the top rate on the personal income tax were reduced from its present level of 91 percent to 80 percent next year, and then successively to 70, 60, and 50 percent, the cut would probably not reduce revenues at all. It would in fact, probably increase them. I have pointed out in preceding articles (March 29, 1954) that “of the $31 billion that the personal income tax yields, only about $1 billion comes from the rates above 50 percent.” All we have done by these confiscatory rates on the higher incomes has been to erode the incentives to produce higher incomes.

The reason why neither of these two tax reductions is now discussed is purely political. The Democrats started up the propagandistic howl that the Eisenhower Administration is a government “for big business” and “for the rich.” Administration officials seem to be in deadly fear of this charge. But they are likely to do best politically as well as economically if they act now with statesmanship, courage, and sense.

It was recently calculated that American industry has invested about $12,500 for every job it has created. This tremendous investment putting incomparably more and better machines and equipment in the hands of the American worker than in the hands of any other worker, is the main if not the sole reason why the American worker’s productivity is greater than that of any other worker in the world, and why his wages are correspondingly greater. If industry is drained of these investment funds American supremacy will be lost. If the incentives to earning, saving, an investing wealth are removed, the very source of productivity and high wages will be removed. By all odds the best way to “help the little fellow” is to encourage the profits, savings and investments that make his job and his income possible.