President Carter gambled this week that voters will accept the necessity of major business income tax cuts as a key to lower inflation in the future and not be upset by the small amount of tax relief for individuals.
That acceptance, however, will require something of an act of faith, since the payoff from lowering business taxes will be slow in coming and perhaps disappointingly small.
Aside from income tax cuts for both individuals and business to offset scheduled Social Security tax increases, business would get $9 billion worth of reductions next year and individuals only $4.9 billion. In 1982, the business cuts in the plan jump to $16 billion while the individual cuts rise to only $5.9 billion.
This striking departure from the mix of relief in most past tax cuts is supposed to spur business investment, which in turn is to lead to increased productivity and ultimately to lower inflation. To that end, total corporate income taxes would be cut by more than 13 percent next year -- again not counting the Social Security offset -- and by nearly 22 percent in 1982.
The administration calculates that by the end of 1982, as a result of these cuts, business investment in new plants and equipment would be running about 10 percent higher than it would without the cuts. That would mean an additional $30 billion or so of such investments in 1982. Part of that increment would be the result of the direct investment incentives Carter proposed and part would flow from the faster economic recovery the entire tax and spending package would generate.
Economist Otto Eckstein of Data Resources Inc., who endorses the thrust of Carter's proposals but wishes they were even larger, estimates the tax cuts will encourage investment sufficiently so that in four years the nation's basic inflation rate will be 0.6 or 0.7 percentage points lower than it otherwise would have been.
Administration economists believe the impact on inflation will be slightly greater than that, but not much.
This pair of estimates underscores the intractability of the inflation problem in the United States and how little difference even a large increase in tax-related investment incentives can make. In 1982 those incentives -- faster depreciation, as well as larger investment tax credits, a portion of which would be paid even if a company owed no tax -- would add up to nearly one-fourth of the tax liability of all corporations.
What the administration wants to do is simply to increase the amount of gross national product going into business investment.To do that, the other claims on the nation's output -- personal consumption, residential construction and government purchases -- must be reduced. That is why Carter's package has such small cuts in personal income taxes and never mentions housing.
This approach contrasts sharply with that of Carter's Republican opponent, Ronald Reagan, who has proposed a very different scheme for increasing business depreciation allowances that would, over the next five years, provide less tax relief than Carter's plan.
Instead, Reagan has proposed a 30 percent cut in personal income tax rates which, he argues, would so increase individual incentives to save and invest that business investment would take off and the economy would grow swiftly.