An article by William Fitzgerald, "Tax Cuts Should Be Aimed at Consumer Groups," appeared in Washington Business Feb. 2. In it, Fitzgerald decries our heavy tax burdens, especially on those earning less than $20,000, and the alleged preoccupation of economists with the health of business and investment.
He concluded that such cuts are not inflationary -- given our excess capacity -- and over the long run will stimulate savings, investment and producetivity. I do not know where Fitzgerald has been these past several decades, but it appears that the Keynesian revolution has passed him by.
It was not a preoccupation with business and investment that led to a stiff capital gains tax, when many other nations have no such tax at all. Nor were our lawmakers coddling business and investors when they enacted high corporate tax rates, some of the slowest depreciation write-offs in the industiral world and double taxation of corporate dividends.
Until recently, the lion's share of any tax relief was directed precisely to the low-to middle-income groups mentioned by Fitzgerald, precisely to stimulate demand. Higher-income groups, which include heavier savers, faced steeply progressive income taxes. Indeed, income from interest and dividends is taxed at high rates -- up to 70 percent -- than wage-salary income. In the effort to redistribute income and stimulate demand, there has been almost a cavalier disregard of impacts onn the economy's supply side. The demand may exist, but what happens when the supply does not meet it? Isn't this part of what our inflationary experience during the 1970's has been about?
Such neglect extends beyond taxes to regulation. Since the late 1960's there has been a dramatic growth in business regulation. All too often, Congress and the bureaucracy neither knew or particularly cared about the economic consequences of these strictures. Business absorbs some of this cost through lower profits, lower wages and the like, but much of it is passed on in the form of price increases to customers.
Inflation exacerbates the problems still further. Existing depreciation provisions are predicated on stable prices. In our current environment, however, capital recovery is insufficient to pay the inflated prices of replacement equipment. Inflation moves individuals and firms into higher marginal tax brackets, even though their real incomes may not have changed. This so-called "bracket creep" amounts to a disguised tax increase every year. Inflation discourages saving -- especially when coupled with our interest rate ceiling -- and encourages debt.
Not surprisingly, the hook of an increasing tax burden, coupled with the left jabs of mounting regulation and inflation kayoed savings, investment and productivity. The personal savings rate has fallen sharply since 1975. At that time, it was 8.6 percent of disposable income. The corresponding figure for 1980 was 5.7 percent.
I believe these problems can be mitigated by cutting back on burdensome regulations and raising the financial reward to savers and investors. The greater reward will promote more savings and investment, which, in turn, will result in greater productivity and an increased ability to absorb higher production costs. This should have a favorable impact on inflation.
Those who take Fitzgerald's point of view dismiss these direct approaches to the problem. But is Fitzgerald's prescription more credible? Should we really believe that meaningful injections of new savings and investment will result from concentrating tax relief on the heavy consuming sector of our population? Our experience over the last several decades not support that assertion