Starting the Countdown Toward a Cut

TAXES

In a few more days, storekeepers and their customers will begin the annual countdown of the number of shopping days left before Christmas. Counting along with them this year will be worried economists, who will be watching to see if consumers go on a buying spree that might lift the economy out of its doldrums. If that does not happen, President-elect Jimmy Carter is almost certain to recommend that Congress do the job instead by enacting a temporary tax cut of $10 billion to $15 billion--probably in the form of rebates to individuals on their 1976 taxes.

The faint possibility that Christmas buying will spark a business revival is about the last reason that Carter's advisers see for hesitating on a tax cut. Indeed some, including his chief economic adviser, Lawrence R. Klein, urged Carter to call for a reduction late in his campaign. Others successfully opposed the idea on two grounds: 1) such a plea might look like an attempt to buy votes and backfire politically; 2) it seemed possible at the time that federal spending, which fell $11 billion below target levels in the first nine months of 1976, might surge about that much above expectations in 1977 and stimulate the economy enough to make a tax cut unnecessary.

Both those reasons for delay have now effectually disappeared. The election, of course, is over. And last week the Office of Management and Budget estimated that spending in fiscal 1977, far from soaring beyond expectations, will actually run slightly below the $413.1 billion called for in Congress's budget resolution. Nor does it seem probable that the lagging economy will speed up spontaneously. Quite the contrary: all the numbers are going the other way, and economists are once again lowering their forecasts.

New Figures. The Government this week will announce new figures on how much the national output of goods and services rose in the third quarter; the growth rate may turn out to have been even less than the anemic 3.9% first estimated. Unemployment rose to 7.9% in October from 7.8% in September, and layoffs are still spreading. General Electric Co., for example, disclosed last week that after Thanksgiving it will start laying off 8,500 of the 13,300 hourly workers in its Appliance Park complex at Louisville, Ky. Though no one can yet predict how strong Christmas buying will be, retail sales in October rose a mere .3%, to $54.1 billion--less than $100 million above the level of June.

Even within the lameduck Ford Administration, some officials are beginning to believe the economy needs some temporary stimulation. Says one Ford economist: "If the numbers don't move in the next couple of months, no one will stand in the way of a tax cut." In fact, Ford in his final budget will propose a tax cut of $10 billion and tie the cut to reductions of $15 billion or perhaps $20 billion, to begin about a year from now, in federal spending programs.

The overwhelmingly Democratic Congress, of course, will ignore most of Ford's suggested spending reductions. Carter will also be very wary of permanent tax cuts because in future years they would reduce the revenue needed to finance the new or expanded federal programs he wants to launch. So the best bet for January is a one-shot rebate on 1976 income taxes--though Carter is getting other advice on the form of a tax cut. Wellesley Economist Carolyn Shaw Bell, for example, proposes a temporary income tax reduction equal to an individual worker's Social Security tax withholding for, say, a two-month period. Al Ullman, chairman of the tax-writing House Ways and Means Committee, is not yet sure that a tax cut is needed; if it is, he would like to see it include business investment incentives rather than being focused entirely on individuals, as Carter apparently intends. Ullman, however, is sure he and Carter "can get together."

Compelling Case. One remaining doubter is Federal Reserve Board Chairman Arthur Burns, who last week warned Congress that stimulating the economy risks speeding up inflation, and pleaded for "fiscal discipline." But he did not flatly oppose a tax cut, and Administration officials believe he may yet accept one. Even if he eventually comes out against it, say Federal Reserve insiders, some of the Reserve's six other governors may take issue with him. That is a measure of how compelling the case for a tax cut is becoming.

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