Trying to Build Confidence

Monday, Jan. 30, 1978
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a violent leap in interest rates.

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The trouble in tackling any of these problems is that a too vigorous attack on one may well aggravate another. Considering only economics, the standout example is the unemployment-inflation dilemma. Aggressive stimulation of the economy through heavy federal spending or extra-deep tax cuts might initially slash unemployment, but it might also push up prices; an all-out attack on inflation involving deep cuts in spending might bring on a recession, with rapidly rising unemployment. But the White House cannot confine its attention to economics; political and social claims must be weighed too. Thus any presidential economic program is a series of uneasy compromises, and Carter's is decidedly no exception.

In the field of tax policy, for example, the President totally committed himself during the campaign to reforming a system that he called "a disgrace to the human race." While he now accepts Blumenthal's argument that tax cuts must take precedence, he could not simply abandon his campaign pledges. So he coupled his rate-slashing proposals with a call for a modicum of reform.

The most consequential reform would be replacing the present $750-per-person income tax exemption with a $240 credit. The exemption reduces the amount of income on which tax is paid; the credit would be subtracted directly from the amount of tax due. For complex technical reasons, the effect would be to give an extra tax break to people earning less than roughly $22,000 a year, while reducing the benefit of tax cuts for people who earn more. Other reforms that the President proposed would further restrict certain tax shelters for well-off people, end a scheme under which companies can defer taxes on part of the profits earned by exporting goods, tax more speedily the profits that U.S. -based corporations earn overseas, and cut in half permitted deductions for business meals—an attack on the by now fabled three-martini lunch.

Oregon Democrat Al Ullman, chairman of the tax-writing House Ways and Means Committee, last week voiced opposition to most of the remaining reform ideas, especially the provision about business meals, which he feared would cripple the hotel and restaurant industry. Congress is likely to knock out many of the reforms, and that would push the whole program askew. Without the revenue-raising reforms, Carter's proposals would result in tax cuts totaling $34 billion a year—$24 billion for individuals, $8 billion for business, $2 billion in excise and payroll tax elimination—and that amount might be inflationary. The President himself, in a special tax message, said: "The full cuts in personal and corporate tax rates which I recommend would not be desirable in the absence of significant reform."

The justification that Administration officials give for the weak anti-inflation program amounts to saying that they could not think of anything else.

If you have to do something about inflation, and if you feel you must accept a $60 billion budget deficit for the sake of growth, and if you rule out wage-price controls or anything smacking of them as unlikely to work, what is left but a plea for voluntary cooperation by management and labor to hold down pay and price increases? And if the whole economic program depends on business cooperation and confidence anyway, why not make the