Everything You Want to Know About Phase II

Since you won't allow an extra big bonus for some of my better workers this Christmas, I'm going to get around it by cutting everybody else's salary that week so my favorite workers will still get special treatment. Is that legal?

THE employer in Phoenix who came up with that idea will undoubtedly be remembered as the Scrooge of Phase 11, at least by his nonfavorite employees. Officials at one of the 2,800 branches of the Internal Revenue Service, which handles inquiries about what can and cannot be done under President Nixon's economic controls, concluded that the man's plan was indeed legal. Charitably, they added that it might have a bad effect on company morale.

His query was just one of some 377,000 individual questions that have flooded into IRS offices since the controls were clamped on five weeks ago. That is one telling measure of the confusion that persists about the program, in no small part because the rules seem to be broken regularly by the panels in Washington that are supposed to enforce them. The most serious missteps in Phase 11 have been caused by the paralyzed Pay Board, which has given the impression that it cannot do its job of halting inflationary wage settlements. Few experts have yet markedly changed their opinions--whether optimistic or otherwise--about its chances for eventual success. Here are some of the main questions being asked about Phase 11, and the answers to them so far as they have been explained by the controllers.

HOW MUCH CAN PAY REALLY GO UP?

The guideline is 5.5% annually, but that does not necessarily apply to every paycheck. The rule that most directly affects the majority of low-or medium-paid workers--including millions of nonunionized whitecollar, clerical and semiprofessional employees--is that the total, or aggregate wage increase must be held to 5.5% within each "employee unit." Such a unit could be a department, a whole company, or a labor union that in the past has been grouped together in the same wage adjustment. Thus the boss is perfectly free to grant 10% pay raises to secretaries and only 1% increases to cleaning women, provided that their wage levels have been generally set as part of a single agreement in the past and the combined total does not exceed the guideline. Some union pay increases--and those of nonunion employees that traditionally are granted at the same time--will doubtless continue to exceed the guideline for a while. Labor Secretary James Hodgson admitted as much last week by noting that the Administration fully expected to "swallow" a few extra large settlements early in Phase 11. These included the 15% pay boost granted coal miners in the first year of a new contract and a pact giving railroad signalmen a more than 16% raise, which was approved last week by the Pay Board. But all settlements involving more than 1,000 workers must be reported to the Pay Board, and the Administration expects that cases exceeding the guideline will become few and far between after the first few months of Phase 11.

DOES THE 5.5% GUIDELINE APPLY TO EXECUTIVE SALARIES?

Probably not. The Pay Board last week named a three-man subcommittee to study the pay of men at the top and will make special rulings about it in a few weeks. The subcommittee will also determine just what jobs qualify for executive pay. But for the time being, executives are bound by the same restrictions as everyone else. At least one top tax bracketeer is obeying: AFL-CIO Chief George Meany has instructed the union comptroller to withhold the 28% pay increase (to $90,000 annually) that he recently got--until it has been approved by the Government.

DOES THE PAY GUIDELINE LIMIT THE FEES OF DOCTORS, LAWYERS AND OTHER PROFESSIONAL MEN?

Thus far the IRS has held that professional fees, like prices, cannot be raised except to offset increased costs, like higher rent or staff pay raises. Violators are subject to a maximum fine of $5,000. Patients and clients who have complaints are advised to take them to the IRS.

ARE MERIT RAISES ALLOWED?

Sometimes. Generally, merit raises are awarded for high performance to executive-level employees who are too far advanced in rank to expect quick promotions but may not be covered by general wage packages. Companies that scheduled regular salary reviews and merit increases before the wage-price freeze may continue to do so. Moreover, these raises can be awarded in whatever amount and at whatever interval had been customary in the past, even if they thereby exceed the guideline in individual cases. But unless merit increases have been an established practice, they will not be permitted in Phase 11, and in any case they count as part of the 5.5% aggregate increase allowed each employee unit.

ARE NEW FRINGE BENEFITS CONSIDERED A PAY INCREASE?

Yes. Funds contributed by an employer toward pensions, profit sharing, insurance, cost of living allowances and any other benefit are part of an employee's pay and thus count against the total permissible amount of a wage increase. (The rules on some complicated benefits, including stock options, have not yet been clarified.) Even additional vacation time and shorter work weeks must be taken into account. However, just as new fringe benefits count as a pay increase, those already provided by an employer are part of a worker's base pay. Thus if he receives no additional fringes an employee may be able to get a raise above his actual salary considerably higher than 5.5%.

WHICH EMPLOYEES ARE EXEMPT FROM ANY PAY CONTROLS?

Federal workers, the U.S. military and anyone who earns below the federal minimum wage of $1.60 hourly.

HOW MUCH CAN PRICES BE RAISED?

An overall goal is set at 2.5% annually. In fact, most prices are not supposed to rise at all unless a firm can show that it is charging more, strictly to offset new costs. Even then, price increases are not being allowed if they will raise a firm's profit margins--or its earnings percentage of sales--over those of a base period. Each company can set its own base period by choosing the average of the best two out of its last three fiscal years. Retailers may pick their highest customary markup for any product line during the same period. However, those retailers who have always "discounted" from the list price of products must continue to do so.

ARE PROFITS FROZEN?

Definitely not. First of all, companies can increase their total profits by increasing the volume of sales. Moreover, they can lift their profit margins--the percentage of each sale that can be pocketed--provided that they do not raise prices. Examples of ways that such gains could be accomplished include: new efficiencies in production, substitute materials that lower costs (but do not lower quality), and reduction of labor input through automation. As long as a firm does not seek a price increase, it is free to chalk up profit gains in any way it can.

CAN A SHOPPER CHECK IF PRICES HAVE BEEN RAISED EXCESSIVELY?

By next month, every store will be required to post a list of prices showing how much it charged for its best-selling items just before the freeze. Customers who cannot find such lists should ask the manager for one and, if still dissatisfied, phone the IRS. That agency can order the storekeeper to comply.

WHY HAVE SOME PRICES ALREADY GONE UP MORE THAN 2.5%?

There could be several legitimate reasons. Some sellers were caught by the freeze with their prices at unusually low levels--a TV manufacturer who was running a semiannual factory sale, service-station operators who were in the midst of a gas war. These businessmen are free to raise their prices to base-period levels. But there is at least an equal chance that a price raise is not legitimate, particularly if it is tacked on by a small operator. With only 3,000 IRS workers exclusively assigned to explain and patrol Phase 11, enforcement at the local level has been spotty at best.

CAN THE 10% SURCHARGE ON IMPORTS BE PASSED ON TO THE CUSTOMER IN FULL?

Yes, but the actual retail price increase will be less than 10%, because the surcharge is based on wholesale prices.

ARE FOOD PRICES EXEMPT FROM THE CONTROLS?

Some are, many are not. "Raw agricultural products," meaning those that go from grower to buyer without processing, are exempt from price controls. They include fruits and vegetables sold at the supermarket produce counter, but not meat and eggs, which are trimmed, packaged or otherwise "processed." Imported foods, like other foreign goods, are surtaxed on entry to the U.S. and are not subject to price controls on original sale, but are thereafter.

WHAT OTHER PRICES ARE EXEMPT FROM CONTROLS?

New life insurance policies, used cars, and almost anything else sold secondhand--including houses, antiques, precious stones--and, according to a /uling last week, Christmas trees that are fresh-cut and not fireproofed or "treated."

ARE THE RATES CHARGED BY ELECTRIC, TELEPHONE AND OTHER UTILITY COMPANIES SUBJECT TO PRICE CONTROL?

Generally no. Since their rates are already regulated by state and local governments, utility companies are usually not bound by federal regulations. However, the largest ones are required, like other giant corporations, to notify the Price Commission if they request or are granted permission to raise their rates; the commission conceivably could trim down the inflationary ones.

ARE STATE AND LOCAL TAXES SUBJECT TO THE GUIDELINES?

No. They can be raised as usual by legislatures or other authorities, and so can parking fines and other penalties. But bridge tolls, admission to publicly owned ice skating rinks and other "user charges" come under the controls. Also subject to Phase 11 rules: all college tuitions, whether the school is public or private, and charges for room and board.

WHAT ARE THE RESTRICTIONS ON INTEREST RATES AND DIVIDENDS?

Legally, none. But a committee headed by Federal Reserve Board Chairman Arthur Burns was appointed to keep a close eye on both sectors. It has said nothing about interest rates, which have been falling. Burns asked corporations to voluntarily hold back dividend increases to a maximum of 4% above the base years.

HOW MUCH CAN RESIDENTIAL RENTS GO UP?

As of last week, the rent of most apartments was still, in effect, frozen at the level of last Aug. 15. Reason: a 15-member Rent Board headed by former Congressman Thomas B. Curtis was still debating guidelines for future increases. They are expected almost any time. Meanwhile, IRS officials have told thousands of tenants that "they may wish to refuse to pay added rental charges" unless the landlord can justify them. Such increases are permitted in three cases. 1) Apartments in which rent is controlled by local or state authorities do not come under federal regulations, and thus rents for these units may be increased. 2) The rent for any other units may be increased if 10% of "substantially identical" apartments owned by the landlord had been rented at a higher price during the month before the freeze. In that case, the higher price may be charged in all similar units. 3) Vacation apartments in Florida, Arizona and other sun meccas can be rented at last year's winter rate rather than the lower one prevailing when Nixon's freeze went into effect in August.

Guiding the U.S. economy into its first peacetime period of controls is an enormously complicated job, and an unpleasant one for longtime Free Marketer Richard Nixon. He was determined to keep the bureaucracy of Phase 11 as soon as possible. Nevertheless, the IRS will soon need reinforcements in its job of policing the controls, especially since tax time is approaching. Many of the IRS watchdogs who have spent their working hours since August looking for violators of the freeze and Phase 11 were taken away from normal duties, presumably allowing other tax violators to go undetected.

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