Myths & Taxes

The standard economic indicators are far from alarming. Industrial production edged up in May. reaching a record high. Nonfarm employment increased by more than the normal seasonal advance, achieved a new peak for the month of May. The average factory work week lengthened to 40.5 hours, a figure not exceeded since booming 1955. All in all said Commerce Secretary Luther Hodges after reading off a batch of statistics, "business still looks awfully good.'' Nevertheless, the New Frontier was worried.

Even the most encouraging indicators still lacked the surge that the Administration had hoped for. And then there was the stock market (see BUSINESS). Was its performance a signal of trouble ahead? And if it was. how should it be treated? Many businessmen and economists felt that there was a need for immediate action--and the most obvious medication was a quick tax cut. On this point, some conservative businessmen found themselves in rare agreement with Minnesota's liberal Senator Hubert Humphrey, who demanded an immediate $5 billion slash in taxes. Treasury Secretary Douglas Dillon opposed any such remedy on the theory that it would interfere with the broad tax-reform program that the Administration has promised for later. Testifying before Virginian Harry Byrd's Senate Finance Committee. Dillon made this decision seem unshakably firm. Asked Byrd: "As the chair understands it, you have no immediate intention of recommending a tax reduction at this session [of Congress]?" Replied Dillon: "None whatsoever." But the policy was not really that solid. Dillon assumed that the economy would perk up without a tax cut. If it fails to do so, the argument of Walter Heller, chairman of the President's Council of Economic Advisers, who wants an early tax reduction, will probably prevail.

"Enemy of the Truth." Having decided to do nothing for the time being, the Kennedy Administration came forward with speeches, pronouncements and comments about the economy. The most conspicuous effort was President Kennedy's Yale University speech. It was the work of several minds. Sometime Harvard History Professor Arthur Schlesinger Jr., now a presidential assistant, tried several drafts. Another former Harvard professor, Economist John Kenneth Galbraith (now Ambassador to India) contributed a memo. Presidential Aide Ted Sorensen, a longtime Kennedy speechwriter, put together a separate draft, which, with some sprinklings from Schlesinger and Galbraith, became the basis of the final ver sion. Kennedy himself devoted hours to rewriting the speech, and he was still jotting away on the speaker's platform at Yale when the moment came for him to step forward.

Administration insiders billed the speech as an effort to conciliate business, and as a charter of economic policy. Its heart was an extended attack on what the President called "myths." Said he: "As every past generation has had to disenthrall itself from an inheritance of truism and stereotype, so in our own time we must move on from the reassuring repetition of stale phrases to a new, difficult, but essential confrontation with reality.

For the great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest--but the myth--persistent, persuasive and unrealistic." Kennedy categorized the myths: Big Government. "Let us take first the question of the size and shape of Government. The myth is here that Government is big and bad--and steadily getting bigger and worse." Not so, said the President. "For the fact is for the last 15 years the Federal Government, and also the federal debt, and also the federal bureaucracy, have grown less rapidly than the economy as a whole . . . The truth about big Government is the truth about any other great activity: it is complex.

Certainly it is true that size brings dangers, but it is also true that size also can bring benefits." Budget. "Next, let us turn to the problem of our fiscal policy. Here the myths are legion . . . The myth persists that federal deficits create inflation and budget surpluses prevent it. Yet sizable budget surpluses after the war did not prevent inflation, and persistent deficits for the last several years have not upset our basic price stability." Accordingly, "honest assessment plainly requires a more sophisticated view than the old and automatic cliche that deficits automatically bring inflation." Confidence. "Finally, I come to the problem of confidence." In this instance, the myth is that "any and all unfavorable turns of the speculative wheel" result from "lack of confidence in the national Administration." That notion, Kennedy-argued, is false. "Corporate plans are not based on a political confidence in party leaders but on an economic confidence in the nation's ability to invest and produce and consume." Such myths, said the President in his summing up. stand in the way of coping with the problems and challenges of the 19605. "Some conversations I have heard in our country sound like old records, long-playing, left over from the middle '30s ... If there is any current trend toward meeting present problems with old cliches, this is the moment to stop it--before it lands us all in a bog of sterile acrimony.'' President Kennedy and his advisers place boundless faith in his powers of persuasion on TV screens ("We don't need the press any more," said a New Frontiersman last week. "We've got TV") and public platforms. So it must have come as a jolting disappointment to the Administration that the Yale speech notably failed to reassure the business community.

Businessmen were quick to explode at the Kennedy mythology (editorial cartoonists, of course, had a field day). Business is less worried about big Government, as such, than about the spirit in which the vast powers of Government are exercised by the Kennedy Administration--as in the steel case. The inflationary effects of budget deficits are no myth; but neither is it a bold new notion for the '60s that deficits can have a beneficial effect in times of economic downturn. Liberal economists have long held that theory. Nobody claims that lack of confidence in the Administration is the sole cause of the current eco nomic difficulties. But investment decisions do depend on estimates of the future --and the Administration's performance so far has not given businessmen a very bright vision of the future.

Beyond all his verbal assurances, President Kennedy has taken some actions to conciliate business. He has appointed his chief adversary in the steel scrap, U.S.

Steel Corp.'s Chairman Roger M. Blough, to head a businessmen's committee to pro pose ways of dealing with the U.S.'s gold outflow. Last week, to show that he can be tough on labor too, he publicly condemned a threatened strike by airline flight engineers (see following story). Bobby Kennedy recently invited 15 big businessmen to lunch, attempted to persuade them that his brother is not really hostile to business. But he -- like his big brother --felt compelled to warn them that continued hard feeling on their part might lead to presidential hostility.

Businessmen take little comfort from the tax revision bill that the Administration is pushing Congress to pass this year. The chief purpose of the bill is to foster capital investment by granting business firms a special tax credit on purchases of new equipment. Far from being grateful, businessmen have complained that the provision is overly complex and inequitable in its benefits. The bill also contains two other provisions that have aroused a lot of bitter opposition: 1) withholding on dividends and interest, which would impose huge costs and a large burden of paper work on banks and business firms, and 2 ) taxation of unremitted earnings of overseas U.S. corporations (only earnings remitted to the parent corporation are now taxed by the U.S.). This proposed tax on subsidiaries would violate the widely accepted international principle, followed by the U.S. until now, that business profits are taxed in the nation where they are earned.

Probably the best way for the Kennedy Administration to bolster business confidence is to push urgently ahead on complete tax reform. The Administration is already committed to rewrite, so as to give business a better tax break, the depreciation schedules on industrial equipment. It has promised such a revision by July 6. and it can deliver on that vow by executive action, without the approval of Congress. Far more important is overall tax reform, which would plug the loopholes in the present code and lower :he rates on both the personal income tax and the corporation tax. The tax reform bill was originally promised for mid-1962, has now unfortunately been postponed at least until late 1962. Moving ahead at a faster pace on broad tax reform is probably the most important task the Administration faces in its efforts to extricate itself from its economic dilemma.

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