TAX CUTS: How Much & When?

IF the business slump continues, taxes will be cut. But how much and when? Some economists argue that the U.S. cannot afford the $6 billion to $8 billion yearly loss to the Government of the tax-cut packages so far proposed, especially since the Government expects to run into a $4.5 billion deficit in fiscal 1959 without a cut. The answer of tax-cutters is that a cut eventually generates new revenue by stimulating economic activity; for example, the Government lost some $5 billion yearly in revenue when it cut taxes in 1954, but within a year, as the tax cut helped push the boom forward once more, revenue was up $7.8 billion. Those in favor of a tax cut contend that it is a more effective spur than a public-works program. A tax cut can be made fast, putting cash directly into pockets for spending on consumer goods in about two months, thus quickly affecting production. A public-works program takes time to get started, may have no effect until the economy has turned up again--and then contributes to inflation.

To cut as quickly as possible, the United Auto Workers' Walter Reuther is plumping for a temporary suspension of withholding taxes. Ford Motor Vice President Theodore O. Yntema goes even farther, suggests a moratorium on all income taxes, whether withheld or paid quarterly. Neither plan has found much support, largely because both are considered unconventional, difficult to administer. Labor unions and some Democrats have suggested a rise in the personal income-tax exemption from $600 to $700 or $800. Legislators of both parties frown on such a plan because it would free millions of people from paying any taxes, remove the sense of responsibility that goes with taxpaying.

What is much more likely--if the cut is made--is a small across-the-board cut for business, a bigger cut for individuals, and reductions in many excise taxes. Prevalent speculation: P: Individuals will probably get about an 11% cut v. a 12% cut in 1954, giving the taxpayer in the $5,000-a-year-and-under bracket (the biggest group) as much as $1.60 a week more in his pay envelope. Loss in Government revenues: $4 billion. P: Corporations can look forward to a corporate rate reduction from 52% to 50%. Government loss: $1 billion. P: Excise taxes, which have outlived their wartime purpose to discourage use of scarce material and transportation, are certain to be slashed. Likely targets: the manufacturers' auto excise tax, which adds $150-$200 to the cost of an auto (manufacturers say they will pass on the savings); the 3% freight transportation tax; the coal and oil transportation tax; retail taxes on such "luxury" items as leather, cosmetics. Government loss: $1 billion.

The biggest argument over proposed tax cuts is whether they should be temporary or permanent. Illinois' Democratic Senator Paul Douglas favors a temporary cut for six months or a year, with the termination date written into law. The argument for a temporary cut is that, though reinstatement of any cut might be necessary to fight inflation, no politicos would boost taxes with a presidential election coming up unless it were agreed on in advance. On the other hand, many economists and businessmen favor a tax reduction without any cutoff date, believe that a cut advertised as temporary beforehand might defeat its own purpose. Taxpayers might be reluctant to spend on the basis of a temporary cut, instead save their tax bonus.

Whatever tax cut is made, almost everyone agrees it must be made fast to be effective. Though California's Senator William F. Knowland thinks Congress will wait until June before making any tax cut, congressional sentiment is strong to cut taxes in April if the recession is deepening. A lengthy debate over what excise taxes should be cut might further check consumer buying. In Canada, for example, the government dawdled over an auto excise cut last year. Consumers stopped buying in expectation of the cut--and Canadian auto production was seriously hurt.

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