April 7, 1977
Page 10882
A CRITICAL NEED FOR THE PERSONAL INCOME TAX REBATE
Mr. MUSKIE. Mr. President, I address my remarks this morning to the rebate on personal income taxes proposed by the President and provided for in the third concurrent resolution on the budget for fiscal year 1977.
We are in the midst of recovery from the worst economic recession since the 1930's. The recovery has been under way for 2 years, but has proceeded too slowly to cut deeply into unemployment or unused industrial capacity. Unemployment remains at unacceptable levels. Seven million persons, including 21/2 million family heads, are still out of work.
In my home State of Maine, for example, unemployment remains above 10 percent, a figure essentially unchanged from a year ago, despite our hopes for a speedier recovery. And it is a measure of the seriousness of the recession that analysts concluded that 1976 was a relatively good year for Maine's economy, even though 1 worker in 10 did not have a job.
The pace of the recovery slowed down in mid 1976. The Budget Committee recognized this slackening when we proposed the fiscal policy embodied in the second concurrent resolution for 1977. We stated in our report to the Senate that we were prepared to consider a subsequent concurrent resolution early in 1977 if the economic data received by then did not indicate that the recovery was proceeding satisfactorily.
President Carter shared our sentiments. As a candidate for the Presidency, he promised to provide a fiscal policy that would stimulate the economy and reduce unemployment.
Soon after taking office, he sent his stimulus proposals to Congress. The Budget Committee also recognized the need for immediate additional stimulus early this year. In response to the President's proposals and our own recognition of the slowdown in the recovery, we reported the third concurrent resolution to the Senate. Congress reduced the revenue floor for fiscal year 1977 in order to provide additional economic stimulus as quickly as possible.
The need for the stimulus is still critical. The rebate we are now considering provides about 60 percent of the stimulus provided for in the third budget resolution for fiscal year 1977. We adopted the budget resolution with utmost speed in order to facilitate rapid enactment of the stimulus proposals. A month has now passed since the resolution was adopted; we have lost too much time already. If we fail to adopt the rebate we will fall even further behind in our schedule for economic recovery.
Mr. President, the worst possible mistake that could be made in fiscal policy would be to decide, at this late date, that the economy is in fine shape, that effective stimulus is no longer required in 1977, and that the rebate can be abandoned. Policy makers in this country and others have been justly criticized for a lack of steadiness in policy, for stop-go policies. To abandon this revenue reduction now, after it has been incorporated into the spending plans of millions of households and businesses, would be a flagrant example of go-stop policy.
We adopted the third budget resolution because we decided that additional stimulus was necessary as soon as possible. Let us stick to our plans. Let us not attempt to fine tune the economy. We cannot allow our policies to be guided by every small movement of the economic statistics. Should we propose stimulus during the slowdown, oppose it when Christmas sales turn up, propose it again when the severe winter descends, and once again oppose it when spring raises the temperature and our spirits?
Some say we do not need additional stimulus in 1977 because we can expect strong growth in the second and third Quarters. The economy will make up for ground lost during the severe cold and gas shortages of the winter. But these catchup effects do not add to total employment and output during 1977 — they merely redistribute it. They provide no substitute for the steady fiscal policy contained in the 2 year stimulus package originally proposed by the administration and anticipated in the third budget resolution.
What will happen if we reject the stimulus provided by the rebate? The econometric models are virtually unanimous on the point — growth will be slower in the remainder of this year. The Data Resources model estimated that over one-half point of real growth — almost $12 billion of output — will have been lost by the end of 1977. 250,000 fewer jobs will have been created, and unemployment will be higher. Is this the way to signal American business that the demand for their products will be strong in 1978, and that commitments to expand capacity will be rewarded with higher sales? The rebate was needed — and is needed — because the growth in final sales has been slow throughout the recovery, averaging only 4.3 percent. There is still no evidence that business investment will accelerate by itself. Investment waits for solid evidence of continued growth in sales. We need to support steady, solid growth at this point in the recovery, not to undermine it.
Mr. President, some of those who have opposed the rebate have done so not because they believe that additional stimulus is unnecessary, but because they do not believe it will work. I would like to speak briefly to that question as well.
It has been argued that the rebate will not increase consumption expenditures because it will go into savings instead. In particular, it is said that the rebates will simply be used to replenish savings which were used to pay fuel bills. But that is precisely the point. That is the strongest possible argument for the rebate.
How will families pay those fuel bills, and restore their savings, if the rebates are not provided?
They will have to reduce other expenditures. Indeed, there is considerable danger of reduced household spending during the rest of the year for just this reason. Preliminary estimates suggest that the savings rate fell sharply in the first quarter, down nearly to 5 percent, as the fuel bills came in. Household savings were about $17 billion lower than they would have been at last year's savings rate.
The danger is that the savings rate will now move sharply upward, and the growth of spending will be slow. The rebate provides a quick and effective way to improve the financial position of low and middle income families and allow them to maintain their accustomed expenditure. The February survey of consumer attitudes done by Michigan's Survey Research Center found higher confidence among consumers who expected a tax reduction than among those who did not. I have no difficulty understanding this finding, although it seems that some of my colleagues do.
I have never been able to understand why American families would treat the tax rebate very differently from any other small change in their incomes. Economists are very good at telling us what we already know, and one of the things they tell us is that people who receive very large windfalls do not spend it all very quickly. Now that is a very good theory for the winners of State lotteries and the heirs of large fortunes, but I do not see what it has to do with the average American family. For the median family the rebate would be only about 1% percent of annual income .
For once the economists have something useful to tell us, for their studies indicate that small temporary changes in income, such as rebate, get treated much like any other income. They show that the rebate should have a substantial and pronounced effect on consumption expenditure for several quarters after it is paid, which is exactly what it was intended to do.
Dr. Thomas Juster, the director of the Institute for Social Research of the University of Michigan, has recently done a study of the effects of permanent and temporary tax changes on consumer spending and saving. He found no significant difference between permanent and temporary tax changes.
Prof. Saul Hymans at Michigan examined the effects of the 1975 tax rebate and tax cuts on consumer purchases. He found a huge increase in purchases of furniture and household equipment associated with the additional purchasing power arising from the tax reductions.
Arthur Okun of the Brookings Institution, in studying the 1968 tax surcharge, found that the experience confirmed "the general efficacy and continued desirability of flexible changes in personal income tax rates — upward or downward, permanent or temporary."
Still other studies have confirmed the difference in the effects on spending of large and small temporary income changes to which I referred previously.
Mr. President, I do not believe we should withhold the economic stimulus this country needs because of a misapplication of economic theory, or a failure to recognize the abundant evidence which supports the use of the rebate.
I do not believe that future tax revenues should be mortgaged when the new administration is less than 3 months old, and still formulating its programs, if a clear alternative is readily available. I do not believe that we should go further in attempting to devise permanent tax reductions before we have given the administration an opportunity to present its proposals for tax reform.
Mr. President; the way to get the economy moving again is not to put up a stop sign. When the Senate returns from recess on April 18 it will immediately consider the tax bill reported by the Finance Committee. I urge my colleagues to declare themselves in support of a steady fiscal policy and continued economic recovery by supporting the fiscal stimulus provisions, including the rebate, as recommended by the Finance Committee.
One closing point, Mr. President. On yesterday the Senate Budget Committee completed its consideration of the first concurrent budget resolution for fiscal year 1978. That resolution is not directly relevant to the $50 tax rebate, except to this degree: that if it is not enacted, it will affect the revenues we can expect to flow from the Federal tax structure in 1978.
If the $50 tax rebate is not approved, or if in lieu thereof Congress should enact into law the permanent tax reductions proposed by several Republican Senators — and it is their prerogative to do so — revenues that we can anticipate in 1978 will be lower than those provided for in the resolution adopted by the Budget Committee yesterday. The effect will be a larger deficit, lower revenues, lesser ability to deal with tax reform later this year, and the effects on the economy which I have taken the last few minutes to describe here for the benefit of the Senate.
So for all those reasons, Mr. President, it makes sense to enact into law this feature of the President's economic stimulus proposal.
I yield the floor.