Picking a Spur

Sometime within the next fortnight. President Kennedy will decide whether to press for an immediate tax cut to get the economy moving again. If he does urge a reduction, and Congress goes along, the U.S. for the first time will slash taxes during a period of business expansion, with the aim of preventing a recession. What would tax cuts do for business?

Champions of a cut to ordinary taxpayers contend that it would automatically generate enough new spending to fire up idle production lines, make jobs and create almost enough taxable income to pay for itself. This presumes that fresh money will burn a hole in the public pocket, as it nearly always does. Since the average American habitually spends 93-c- out of every dollar he has left after taxes, a cut in personal taxes would almost certainly give a quick fillip to consumer spending.

Money for Modernization. But many businessmen and economists chorus that a slower acting and less politically popular tonic--a cut in corporate income taxes--would contribute more over the long pull. Consumer spending for goods and services is already fairly strong. The real drag on the economy is the disappointing rate of businessmen's spending to expand and improve their plants. Capital spending is the basis of all economic growth, and lately it has been inching along with increases averaging only 1% a year. The argument goes that if corporate taxes were cut now, businessmen would start spending.

Some economists doubt it. Despite the profits squeeze, the majority of corporations have money to spend, if they want to. Dividends are running at record levels, credit is abundant, and the retained profits and depreciation allowances of U.S. corporations are at an alltime peak. Trouble is, total demand for hard goods is weak enough that U.S. industry during the current recovery is producing at only 85% of capacity--barely above the rate at which it operated in the recession year of 1954 (see chart). With the depressed steel industry pouring at less than half capacity, the U.S. Steel Corp. last week announced the closing of its Donora, Pa., furnaces.

All this is used as ammunition by the many vocal advocates of a personal rather than a corporate tax cut, notably the A.F.L.-C.I.O. They argue that the way to get the factories rolling again is to increase consumer demand for industry's products. And for that they call for a cut in personal income taxes in the blue-collar brackets.

A personal income tax cut is also favored by those who are particularly anxious for relief in the higher brackets. University of Chicago Economist Yale Brozen figures it would cost the Government only $80 million to chop the top personal rate from 91% to 50%; but the whole economy would benefit immeasurably because, if they were able to keep more of their earnings, top-bracket entrepreneurs "would undertake new enterprises and risky ventures with which they do not bother now.'' If these same men also got a cut in corporate taxes, they would presumably budget much of it for modernization. Much of the idle 15% of U.S. productive capacity represents noncompetitive obsolescence. Last week Bethlehem Steel felt enough pressure for modernization so that despite uninspiring first-half earnings it announced plans to boost its capital spending by 30%.

2,500,000 Jobs. A cut in corporate taxes from the current 52% rate to the 47% that prevailed early in the Korean war would reduce Government revenues and increase corporate profits by $2.5 billion--a whopping 10% gain for U.S. business. Companies would soon budget well over one-half of this for capital spending, says New York University Economist Marcus Nadler, and every dollar put to such use would turn over so often that it would add $3 to the gross national product. At that rate, a $2.5 billion corporate tax cut could increase the G.N.P. by some $5 billion.

With much the same reasoning, Government economists calculate that a $10 billion tax cut--perhaps $2.5 billion in corporate taxes and $7.5 billion in personal taxes--would add $20 billion to the G.N.P. They also believe it would increase U.S. industrial production from the current 85% of capacity to 89%, and create 2,500,000 jobs. Very possibly. But because there is no U.S. precedent for such an antirecession tax cut, no one knows for sure what would happen until it is tried.

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