The Economy: Guessing Games on Taxes

The performance bristled with suspense. First, Louisiana’s Democratic Congressman Hale Boggs hustled back to Washington after a conference at the L.B.J. ranch with word that the President might request a tax increase of as much as $15 billion. Lyndon Johnson dismissed the report, sniffing that “guesses will be made from time to time—that is a democratic privilege.” Next, Gardner Ackley, chairman of the Council of Economic Advisers, flew down to Austin with a report as bright as the Texas sun: 1967, he said, should bring a “more balanced, moderate kind of growth,” with fewer slowdowns or inflationary pressures. Did this mean that there would not be a tax increase? Said the President: “We have to weigh all the facts before reaching a decision like that.”

Record Deficit. The President now has most of the facts on the scales, but the guessing game is still going strong. For the current fiscal year, Administration experts figure that spending will run between $127 billion and $130 billion, and revenues around $117 billion. Though Johnson last week squeezed $3.3 billion from such programs as highway construction, hospital-building, and urban development, the deficit could still break the postwar 1959 record of $12 billion. That would seem to point to a hefty tax hike—but another estimate crossed the President’s desk last week that pointed in the opposite direction. According to the Commerce Department, industry’s pell-mell increase in plant expansion, which did much to overheat the economy, is slowing down. This year, such outlays increased a lusty 17%—but by mid-1967, Commerce expects the rate to be halved, significantly cooling off the economy.

Some economists are clearly worried that a tax increase next year would, as one California banker put it, “be like hitting an already trembling economy with a sledge hammer.” A veritable drum roll of reasons against a rise was marshaled by Arthur Burns, who was Dwight Eisenhower’s chief economic adviser. “If the purpose of a tax increase is to cool off the economy, such a process is already under way without it,” he told a bankers’ conference in New York. “With the scope of economic expansion narrowing, with labor costs rising, with profit margins shrinking, with construction costs high and running well above investors’ estimates, with the stimulus of the investment tax credit suspended, with the stock market weak, with uncertainty about taxes widespread, and with the business and investing mood gradually becoming less exuberant, powerful additional forces are now operating to take the steam out of the economy.” As if to underscore Burns’s point, General Motors, Westinghouse, General Electric and other producers of durable goods last week announced production cutbacks.

Those who favor a tax increase cite the soaring costs of the Viet Nam war. But they also see it as a means of taking the pressure off tight money and high interest rates—the villains behind the severe slump in housing. Walter W. Heller, ex-chairman of the Council of Economic Advisers, argues that such a “distortion” in one sector could slow down the whole economy. Others agree that the Government should “shift the mix” of its economic policies by easing interest rates while imposing a one-year increase in taxes.

Massaging the Fat. Lyndon Johnson has so artfully arranged the evidence that nobody can be certain whether he intends to raise taxes or hold the line. “New numbers come in almost every day,” said Ackley, and Johnson juggles them with the skill of a center-ring virtuoso. Last week, for example, aides in Austin hinted that the fiscal 1968 budget might total $140 billion—an almost certain portent of higher taxes. Almost immediately, however, they began “massaging” the fat out of that figure. Come January, and—presto!—Johnson will look like a genius if he unveils a budget in the neighborhood of $130 billion instead.

In the meantime, the guesses would continue.