Federal Reserve Board chairman G. William Miller urged the Senate yesterday to scrap the capital gains and business tax reductions passed by the House in favor of faster business depreciation writeoffs.
In testimony before the Senate Finance Committee, Miller argued that more rapid depreciation would do more to spur needed investment than the "shotgun approach" of combinated capital gains and corporate tax rate cuts.
He also again called for a one-year deferral of next January's scheduled increases in Social Security payroll taxes and the minimum wage - primarily as an anti-inflation measure.
Miller made his remarks as the Finance Committee prepared to start formal drafting this morning on the House version of the tax bill, which provides $16.3 billion in reductions, including a cut in capital gains taxes.
Miller also urged the panel to hold the overall size of the tax bill to about $15 billion, warning that any substantial increase from that amount might exacerbate inflation.
It was not immediately clear how much influence, if any, the Fed chairman's recommedation's would have on the committee. Panel members did not comment directly on his proposal to speed up depreciation writeoffs.
Sen. Russell B. long (D-La.), the Finance Committee chairman, has hinted the panel may increase the size of the tax bill to $20 billion and enlarge the cuts in capital gains taxes.
However, Miller's coolness toward the House-passed capital gains tax reductions amounted to something of a setback for proponents of the legislation. Capital gains are the profits from the sale of stocks or other assets.
While generally endorsing the principle of cutting capital gains taxes, Miller cautioned the move would only "remotely" spur investment by business, and probably would not help create new jobs for at least several years.
By contrast, sponsors of the capital gains tax cut have contended the reductions would set off a stock market boom that would heighten investment and stimulate the economy visibly.
In proposing faster depreciation writeoffs, Miller suggested reducing the present guidelines lives by 20 percent for machinery and equipment, with a special one-year writeoff period for government-mandated pollution devices.
He estimated his plan would cost about $5 billion - just under what experts have estimated for the House-passed capital gains tax cuts and corporate tax rate reductions. The House bill includes a break for home sellers as well.
Miller recommended that if the committee adopts his proposal to delay the January Social Security tax hike, it should reduce the income-tax cuts for individuals by $4 billion - equivalent to the wage-earners' share of the delay.
He also suggested that Congress look more closely at ways to overhaul the Social Security system, from raising the retirement age to reducing cost-of-living increases and taxing the benefits paid to high-income persons.
On related issues, Miller opposed as "highly inflationary" the GOP-sponsored Roth-Kemp tax cut bill, which would cut tax rates by 30 per cent over the next three years, contending it would bloat the budget deficit.
He also criticized another GOP-backed proposal, this one by Rep. William Archer (R-Tex), that would provide for the first time an inflation adjustment for capital gains taxes. Miller argued it would help lock in inflation.
Miller's warning to hold the total size of the tax-cut bill to $15 billion or so was based on concern that "excessively rapid growth" in the economy could lead to a rise in inflationary pressures.
"While there is a clear need to maintain the upward momentum of economic activity," he said, " . . . we cannot run the risk of repeating" previous mistakes in allowing the economy to overheat.
Along with his comments on the tax issues. Miller also reiterated earlier assertions that the U.S. must act decisively to combat inflation and reduce oil imports if policymakers are to stem the decline in the dollar.
He also urged the lawmakers to enact the compromise natural gas pricing bill, largely to give the dollar a psychological boost. Miller said the measure was regarded overseas as a symbol of American intentions on energy policy.