The Great Consensus

I am talking about the accumulated evidence of the last five years that our tax system exerts too heavy a drag on growth--that it siphons out of the private economy too large a share of personal and business purchasing power--that it reduces the financial incentives for personal effort, investment and risk-taking.

The audience had heard it before. Eisenhower had voiced the same thoughts in much the same words, and so had a lot of other Republicans over the years. What made the words tonic to the black-tie audience of businessmen at the Economic Club of New York dinner last week was that this time the speaker was Democratic President John Fitzgerald Kennedy. And not only did Kennedy say that federal taxes are too high. He also promised that next month he would ask Congress to reduce both personal and corporate rates--and put the full power and prestige of his office behind the effort.

In pledging tax cuts, the President reaffirmed a promise he had made last August. The most striking thing about his speech was the free-enterprising rhetoric sprinkled through it:

Tax reduction would "cut the fetters which hold back private spending."

It would "reduce the burden on private income and the deterrents to private initiative.'"

"If Government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need."

There were moments when a businessman listening to the President could have shut his eyes and, but for the unmistakable accents, imagined himself hearing an officer of the National Association of Manufacturers.

Gaudy Deficits. The speech was a manifestation of a historic development: the emergence of a broad liberal-conservative consensus that high federal taxes have been largely responsible for the sluggishness of U.S. economic growth in recent years. Among last week's voices calling for prompt and hefty tax cuts to stimulate economic growth were Hubert H. Humphrey, one of the Senate's most conspicuous liberals, and H. Ladd Plumley, president of the U.S. Chamber of Commerce. Implicit in the consensus on taxes is a recognition by liberals that Government expenditures cannot create sustainable prosperity, that individual incentives perform indispensable economic functions. President Kennedy has made that recognition explicit. Present tax rates, he said recently, "are so high as to weaken the very essence of the progress of a free society--the incentive of additional return for additional effort."

In summing up the Great Consensus of 1962, the President's speech also opened what may prove to be the Great Debate of 1963: the inescapable battle over the size, shape and timing of tax cuts. Some members of Congress have already reacted to the prospect of such cuts with the wariness of a man who receives through the mail an unexpected package that emits a ticking sound. And among the wariest are the two congressional veterans who wield the most power over tax legislation: Virginia's Harry Byrd. 75, chairman of the Senate Finance Committee, and Arkansas' Wilbur Mills, 53. chairman of the House Ways and Means Committee. Democrats Byrd and Mills are conservatives predisposed in favor of tax reduction; but they have deep doubts about the timing.

The President's call for reductions at an "early date" seems untimely to men like Mills and Byrd because the federal budget for fiscal 1963 (ending next June 30) shows a deficit estimated at $7.8 billion. Another gaudy deficit, of size unknown, lurks ahead for fiscal 1964. Conservatives fear that tax reduction will deepen the deficits. "I'm not in favor of reducing taxes out of borrowed money," says Byrd, "and that's bound to be the case with any tax cuts next year." Speaking in New York the day before the President, Byrd said he was convinced that "sharp reductions in federal expenditures should precede any major reduction in tax rates."

Similar sentiments issued from several of Byrd's fellow Senators--Kentucky Republican Thruston B. Morton, Kansas Republican Frank Carlson, and even Tennessee's liberal Democrat Albert Gore, who pronounced himself in favor of tax cuts only "if we could reduce Government spending and pay something on the national debt.''

Sulphur & Molasses. Ways and Means Chairman Mills has an additional reason for misgivings about Kennedy's plans. He wants to wrap tax reduction and tax reform in a single package, fearing that if Congress just cuts the rates, the opportunity for reform will be lost.

In the abstract, the case for reform is overwhelming. The U.S. tax structure, built up piecemeal over the decades, is so encrusted with exemptions, deductions, special-case provisions and loopholes for legalized evasion that only 43% of the total personal income in the U.S. is subjected to the federal income tax. The tax laws are inequitable, squeezing the salaried middle class, while enabling some millionaires to escape with relatively light levies, and some wage earners to get away without paying any income tax at all. But, in practice, tax reform runs into formidable political obstacles: taxpayers who benefit from special provisions want to hold on to them. Mills is doubtless right in believing that the taxpayers will refuse to swallow the sulphur of reform unless it is mixed with the molasses of rate reduction--and even then there will be some bitter faces.

Hard to Budge. A few days before the President's speech, Mills put his misgivings on the record in a published interview. "I can't go along with the idea that you just cut taxes without regard to the deficit that is created," he said. He saw no "deterioration" in the economy, and therefore no justification for a "quickie" tax cut. As for a reduction-plus-reform bill, he said, there was little prospect of getting one enacted before January 1964.

Mills's views, which threatened to delay tax reduction until the long congressional battle over tax reform is fought out, gave the Administration a jolt. White House staffers pored over the text of the Mills interview with intensity, found some comfort in a passage indicating that Mills would go along with a tax bill containing "some reforms" that only partially balanced the rate reductions. At his press conference, the President said that Mills and the Administration might not be "so far apart." He intended, he said, to "go ahead with our program." That afternoon, at the President's request, Mills visited the White House. What went on at the meeting remained a secret between Kennedy and Mills, but it is a well-known fact in Washington that Mills is hard to budge once he takes a position.

Paradoxical Truth. In his grapple with Chairman Mills, the President got powerful support from a tax program issued by the Committee for Economic Development, an organization of high-level businessmen, educators and economists. C.E.D. urged deep cuts in personal and corporate income taxes--a total of $6 billion in 1963, plus another $5 billion later on, with the second round of reduction conditional upon the Administration's holding the line on expenditures. Such tax cuts "would increase production, employment, investment and growth in the American economy."

On the urgency of tax reform, the C.E.D. disagreed sharply with Mills. "We hope that action in the early part of 1963 will not be delayed by disagreements about the precise size and distribution of the tax reductions. It would be particularly unwise to defer action pending the resolution of a list of perennial and highly controversial problems of the tax structure." The C.E.D. also disagreed with the Byrd view that 1963 tax cuts should be accompanied by substantial reductions in Government expenditures. Tax reduction, argued the C.E.D., would so stimulate the economy, by fostering investment and demand, that revenues would rise high enough to erase the deficit and bring the budget into balance.

In his speech, the President, too, argued that the deficit resulting from tax reduction would be only temporary. What had caused the chronic budget deficits of recent years, he said, was not excessive expenditures, but a too low level of economic performance, resulting in inadequate federal revenues. "In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low --and the soundest way to raise revenues in the long run is to cut rates . . . The purpose of cutting taxes now is not to incur a budget deficit but to achieve the more prosperous, expanding economy that can bring a budget surplus."

"Our practical choice," he went on, "is not between a tax-cut deficit and a budget surplus. It is between two kinds of deficits--a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy, or a temporary deficit of transition, resulting from a tax cut designed to boost the economy. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future."

Creeping Threat. But the President included in his speech some public concessions to Chairman Mills. Noting that Mills had called for "increased control of the rises in expenditures," Kennedy said: "That is precisely the course we intend to follow in 1963." The new budget, he promised, would show no expenditure increases except for defense, space, and interest on the national debt. Trying to soothe Mills's fear that tax reform would be jettisoned, the President promised that his bill would call for "enactment of long-needed tax reforms, a broadening of the tax base, and the elimination or modification of many special tax privileges."

What Kennedy was planning, though he did not say so in his speech, was a two-step approach: first, tax reduction paying lip service to reform; then, perhaps much later, real reform, sweetened with additional cuts. Concluded the President: "A high order of statesmanship and determination will be required if the possible is not to wait on the perfect. But a nation capable of marshaling these qualities to meet a sudden and dramatic threat to its security is surely equally capable of meeting a creeping and complex threat to our economic vitality."

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