Pre-Emptive First Strike on Taxes

What could possibly sound more appealing? A record-breaking income tax cut of $28 billion. An equally sharp slash in Government spending. Both aimed, as President Ford said of his proposals last week, at "getting the Government off your back and out of your pocket." Insisted Treasury Secretary William Simon: "There were no political considerations in this decision whatsoever."

There did appear to have been some political considerations in the timing of the decision, however. As it was evidently intended to do, Ford's surprise announcement that he wants another big tax cut beginning on Jan. 1--coupled with an equally sharp cut in spending later in the year--left congressional Democrats squirming. With one stroke, the Administration seemed to have seized the initiative on tax and budget policy, two issues that promise to be crucial in 1976.

Although there were forecasts that Ford would ask for a tax cut balanced by a slash in spending (TIME, Oct. 13), his tax plans were one of the best kept secrets of his Administration.

Torn-Up Timetable. Originally.

Ford had planned to follow tradition and unwrap his tax proposals in his State of the Union address in January But that timetable was torn up last week, when Democratic Congressman Al Ullman's Ways and Means Committee seemed to be making fast progress on a complicated package of tax reforms. Beyond revising the tax laws, Ullman expected to extend most provisions of the "temporary" tax cut that had been enacted earlier this year to spur the lagging economy. These lower rates are scheduled to expire on Jan. 1, and without action before then, withholding rates will revert to the higher 1974 levels.

Ullman's committee had planned to call Simon last week to testify on whether the Administration would support such an extension. The White House did not see Ullman's hearings as the best forum for a major Administration tax statement, so Ford decided to get the jump on the Democrats.

He did so early last week in a hastily scheduled speech. Ford declared that the U.S. has been following a "path toward bigger Government, higher taxes and higher inflation." He warned that "down that road lie the wreckages of many great nations of the past." Instead, he said, the U.S. must reduce both taxes and spending. Insisting that "it would be dangerous and irresponsible to adopt one without the other," he vowed to veto any attempt by Congress to enact tax cuts without committing itself to spending no more than $395 billion in fiscal 1977, which begins next Oct. 1. Without such a ceiling, the White House claims, the 1977 budget would reach at least $423 billion, up $53 billion from the 1976 budget on which Congress is still working.

Ford said his proposal would save companies and individuals $28 billion, "the biggest single tax cut in our history." Yet the claim was deceptive. Ford's figures were based on the 1974 permanent rates, which did not take into account the projected impact of the temporary cut now in effect. The present rates would have produced a $17 billion reduction in taxes next year. Thus, in reality, the Ford cut would amount to $11 billion, which would translate into an increase of $2 to $8 in the typical wage earner's weekly paycheck.

Ford's tax reduction would give more relief to middle-and high-income individuals than those in lower brackets (see chart). Because he intends to abandon the recently enacted "earned-income credit"--which reduces the tax bill or provides an actual rebate for families earning less than $8,000 a year --Ford would in effect raise taxes for some poor families. His plan would also:

P: Increase personal exemptions for taxpayers and their dependents from the present $750, to $1,000.

P: Establish a uniform standard deduction of $1,800 for single individuals and $2,500 for married couples not itemizing deductions. Currently this deduction varies as a percentage of income, with a maximum of $2,300 for single people and $2,600 for couples.

P: Lower the rates for all taxpayers with incomes up to $10,000.

P: Help businesses--which would get one-fourth of the total tax reduction --by lowering the maximum levy on corporate profits from 48%, to 46%.

Even if the size of the tax cut is not as large as billed, Ford was in the comfortable political position of having suggested a reduction larger than any being seriously contemplated in the Congress. Ford and the Democrats have now plunged into bitter disagreement over whether Congress should--or can--impose a limitation on a budget that will not become effective for nearly a year.

Ways and Means Chairman Ullman fumes that the very idea is "totally preposterous." Congress, he points out, can scarcely be expected to deal with "a mythical budget that doesn't exist. Now if the President really wants a $395 billion budget, he ought to send it up." Democratic Senator Hubert Humphrey dismissed Ford's proposal as "a subtle ploy but not hard for people to figure out: give 'em a tax cut in January and hack the budget after the elections."

The Administration appeared to relish the squabble. In his White House press conference, Ford scourged the Democrats: "I can't imagine a Congress not having enough imagination to combine a spending limitation and a tax reduction. If they don't, there ought to be some changes up on Capitol Hill."

Ford's pre-emptive first strike on the issue of tax and spending cuts seemed like shrewd economics as well as clever politics. On the one hand, most economists, including a good many conservatives, are persuaded that more stimulus, in the form of bigger tax breaks, will be needed in the future to ensure that the recovery continues. At the same time, even liberals will find it hard to deny that some effort to hold down federal spending is necessary. However, some economists wonder whether Ford's challenge will have the intended impact on Capitol Hill. For instance, Republican Murray Weidenbaum, a member of TIME'S Board of Economists, finds Ford's concern with spending "well conceived," but he questions whether Congress can be made to think about overall ceilings in a budget it will not even have a chance to see on paper until next January.

In fact, the Democrats may try to deal with Ford's initiative by ignoring it. The current prospect: Congress will reject Ford's demand for a ceiling on spending and will extend the present package of tax cuts, daring Ford to veto it. If he does, Congress can probably muster the votes to override. Then it can await Ford's own budget proposals next January--which he has promised will not exceed $395 billion--and go to work on approving or rejecting the Administration's spending program. By that time the political argument may be something of a standoff, Budget Cutter. However most voters may react to the argument, Ford's antispending stance helps him with conservatives in his own party. Ford announced his tax and spending plans just as California's Ronald Reagan approved the creation of a campaign committee to prepare his challenge to Ford in New Hampshire's opening presidential primary next February. Nor did it seem happenstance that only ten days earlier Reagan had presented a vague plan to whack some $90 billion out of federal spending, a move clearly designed to establish himself as the boldest budget cutter of them all.

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