Cutting the Cut

Carter gives in on taxes

Over scrambled eggs and bacon at the White House last Thursday morning, Jimmy Carter broke some important news to the chairmen of the congressional budget committees, Senator Edmund Muskie of Maine and Representative Robert Giaimo of Connecticut. Said the President: "I think it's wise to go along with a lower tax cut."

With that calm announcement, Carter signaled that he had finally been persuaded by the advice that most businessmen, economists and congressional leaders have been giving him for several weeks: his proposed tax cut of about $25 billion is too large. In December, when he first proposed a cut of that size, Administration economists figured that it was needed to stimulate profits, investment and employment, and thus head off a business slowdown forecast for the second half of the year. Since then, inflation has picked up speed, to an annual rate of 9.2% during the first quarter of the year. Observed Charles Schultze, Carter's chief economic adviser: "Economic conditions change, and we would be idiots not to change."

Carter will now seek a tax reduction of roughly the $19.4 billion that Democratic congressional leaders have been telling him the House and Senate will pass. Further, he wants the cut to take effect on Jan. 1, 1979, three months later than he originally proposed. As a result, according to the Administration's calculations last week, the projected 1979 deficit will be slashed by about $10 billion, to a total of $53 billion, and inflationary pressures will be considerably reduced. In turn, said Schultze, there will be less pressure on the Federal Reserve Board to clamp down on inflation by a further tightening of credit. That same argument was presented to Carter by Reserve Chairman G. William Miller in private pleas for trimming the tax cut.

The initial reaction from many business leaders was that the economic stimulus to be expected from the proposed cut was not worth the extra deficit that it would add to the budget. Asked Irving Shapiro, chairman of Du Pont de Nemours & Co.: "Why have it at all if the reductions are going to be too small to do any good?" Oregon Democrat Al Ullman, chairman of the House Ways and Means Committee, which is handling the tax legislation, welcomed Carter's decision, but said that the cut should be reduced to about $15 billion. In any event, Carter may back down even further if the economy continues to accelerate. Said Schultze, in his typically guarded style: "I cannot say that, if economic conditions change radically, the legislation won't be changed."

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