July 2, 1976
Page 22241
TAX CUT EXTENSION
Mr. MUSKIE. Mr. President, I have three points to make in support of extending the general individual tax credit through fiscal year 1977.
One, the economic recovery demands that a substantial increase in withholding rates, or even the threat of such an increase, be avoided;
Two, the progressive nature of our personal income tax will soon restore the revenue lost through the tax reductions initiated in early 1975; therefore, the Congress is not likely to ever have to raise the current withholding rates;
Three, the Budget Committee and the Congress must have a realistic estimate of revenues before we begin work on the second concurrent resolution for fiscal 1977.
I will elaborate very briefly on each of these points.
The economic recovery is proceeding in an orderly fashion. The economy has grown substantially since the passageof the tax cut last spring. It has grown at a moderate enough pace to have permitted inflation to subside. The recovery must continue.
Termination of the tax credit would mean the end of the largest part of the tax cut for most families. The $1.8 billion estimate refers to the value of the tax credit is only 3 months. The credit is worth $9.5 billion over a full year or $180 for most families. A tax increase of this size must be avoided while unemployment remains high.
Some Senators have argued that we cannot be sure that the tax cuts should be extended. They suggested that the recovery appears stronger than expected when Congress passed its first concurrent resolution. But close examination of the most recent economic forecasts for 1977shows that they are very close to the forecast used in preparing the first concurrent resolution.
I am submitting a table for the record that compares the first concurrent resolution forecast to those of the Wharton School, Chase, and Data Resources, Inc., the three most widely used commercial forecasts. The first concurrent resolution forecast of an average unemployment rate of approximately 6.5 percent for 1977 is identical to the average of the three commercial forecasts. Less than 3 weeks ago, Alan Greenspan,Chairman of the President's Council of Economic Advisors said, "The acceleration is clearly slowing down."
For the recovery to continue, withholding rates must not increase at a $10 billion rate next summer. It is important that consumers know now that Congress has not planned for this increase in the coming fiscal year.
If consumers are to be able to make long term commitments — to buy houses or cars — they must be confident that their paychecks will not be reduced by higher taxes in the future. If we tell them now that the tax cut will expire shortly, they will refrain from committing their future paychecks to purchases of this kind. But we need these long term commitments if the recovery is to continue.
Business is making its investment plans now. They too need to know that the recovery in consumer spending will not be interrupted. The part-year extension in the finance committee bill signals a termination — and that signal is not part of a sound economic policy.
My second point concerns the ability of our progressive tax system to provide large revenue increases without increasesin tax rates.
Some Senators may wonder if a tax increase ultimately will be needed to slow down the economy when the recovery is complete — in effect, to turn off the stimulus that was provided by last year's tax cut. This fails to take account of the fact that taxes are always increasing as an automatic byproduct of our progressive income tax system. As incomes rise for any reason, the percentage of income that is taxed increases. This automatic tax increase will completely offset the tax decrease by the end of fiscal 1977. Revenues in fiscal 1977 are expected to be $61 billion more than in any previous year despite last year's tax reduction. It is this automatic effect that has allowed Congress to reduce taxes four times in the last 13 years without an increase, except for the temporary Vietnam surcharge.
I am submitting a table for the record that shows that the tax burden is already high by historic standards. It is estimated that in 1977, personal income taxes will rise to 9.4 percent of the gross national product, substantially higher than the 8.7 percent average of the last 15 years. And this computation assumes the tax cut will be extended for the full year. Many economists believe that the next major change in tax rates should be a further reduction rather than a repeal of last year's reduction.
My final point concerns the job that will face the Budget Committee when the Congress returns after the Republican convention. At that time, the Budget Committee will begin work on the second concurrent resolution. The conference report on the resolution must be passed by the Congress by September 15.
The second resolution is binding. Any subsequent legislation that calls for a reduction in revenues or an increase in spending beyond the levels set in the second concurrent resolution is subject to a point of order. Such legislation can be blocked until a third concurrent resolution is passed. Therefore, the Budget Committee and the Senate will have to be very realistic about the legislative assumptions we use. Otherwise we will not have a budget we can live with.
Most of us know that the credit will be extended through the fiscal year. That is surely the assumption we will use in September. Let us face the facts now and extend the tax cut.
The tables follow:
TABLE 1.—FORECAST COMPARISON
Real
GNP GNP Percentage of unemployment
Data Resources Inc. (DRI) 1895 1343 6.3
Wharton 1888 1330 6.39
Chase 1877 1325 6.8
Average 1887 1333 6.5
FCR 1885 1338 6.5
Percentage difference FCR vs. average -0.1 +0.5 Same
TABLE 2.— TAX BURDEN (Calendar years) [In percent]
Average Projected
1961—75 1976 1977
Revenue/GNP 19.2 19.7 20.4
Personal income taxes/personal income 10.9 10.7 11.5
Personal income taxes/GNP 8.7 8.8 9.4