The Carter administration, counting on reelection to a second term, has begun work on a major, multiyear tax-cut package designed to speed the recovery from recession next year and greatly increase business investment during the next administration.
The first tax cuts would be effective Jan. 1.
No cuts will be proposed for 1980 -- barring some unforeseen economic disaster -- and details of the tax-cut package will not be sent to Congress before it adjourns this year.
But administration discussion of the tax-cut plan now counters GOP presidential contender Ronald Reagan's pledge of major tax breaks should he be elected.
Some tax cuts for individuals will be proposed, with a tax credit intended to offset part of next year's planned increase in Social Security payroll taxes as the leading candidate. Cuts intended to reduce inflation, such as the short-lived "real wage insurance" plan Carter proposed in 1979, also are under consideration.
The cuts are not intended to stop the current economic decline, which a new administration economic forecast will show ending no later than the fourth quarter of this year.
Instead, the cuts are designed to offset part of the enormous amount of economic restraint included in the 1981 budget as a result of higher taxes. Otherwise, 1981 will be a period of slack demand and sluggist recovery, both administration and private economic forecasts indicate.
The tax cut probably will be in the $15 billion to $25 billion range for 1981 but far larger for later years as the size of the business incentives grows.
However, no firm decisions have been made by Carter's advisers, much less by the president himself, about the size of the tax package or its specific details.
As the presidential campaign proceeds, and the tax-cut package is developed and more of its details are made public, both Carter and Reagan will be proposing investment incentives that will differ in details and timing. w
There is a nearly unanimous consensus among economists that such incentives, focused on the "supply side" rather than the demand side of the economic equation, are needed to improve productivity and lessen inflation.
However, Reagan also wants a 30 percent cut in income-tax rates phased in over a period of three years or more, which he says will also increase an individual's incentive to work.
Carter's strategy, on the other hand, will be to continue to tie such future tax cuts to continued spending restraint.
Administration officials have begun work on the new tax package precisely because they believe Congress achieved a significant degree of spending restraint in its first budget resolution for fiscal 1981, and will continue to do so as appropriations bills are passed, even though the recession has killed any prospect the 1981 budget can be balanced.
Without provision for a tax cut, the 1981 budget probably would be in deficit by $20 billion or so because of a sharp drop in revenues and higher spending on unemployment benefits and welfare due to the recession.
But spending cuts have been made, and such restraint, Carter said in March, would make tax cuts possible. When the president and the Federal Reserve Board jointly announced a new set of budget cuts and credit restrictions on March 14, he declared: "Our priority now is to balance the budget.But once these spending limitations have actually been achieved, we can then provide tax relief to encourage investment. Through fiscal discipline today, we can free up resources tomorrow for the productivity -- improving tax reductions our nation needs."
But Carter now faces a serious political and economic dilemma caused in part by Congress' budget calendar. On July 15 he is supposed to send to Capitol Hill a mid-session budget review and an updated economic forecast.
Officials are known to be concerned that Carter could suffer a further loss of credibility if the review does not reflect in some way his tax-cut plans, since they will have a substantial impact on the 1981 budget.
On the other hand, they fear that any formal commitment to a tax cut now could cause Congress to ease up on its spending restraint, give an erroneous signal to the world that the fight against inflation is over and provide the Republicans with ammunition for charges that Carter has done another flip-flop on economic policy.
In fact, Reagan recently began to criticize the president for a presumed "election-year conversion" to a tax cut. Although the administration is not giving any thought to the sort of simple, across-the-board tax cut designed to stimulate consumer spending often used in the past to fight recessions, Reagan accused Carter of planning a "tinker tax cut" that would not be properly targeted.
Carter's advisers have made no recommendation to him about how to handle the mid-session review problem. The options range from doing nothing more than issuing a statement expanding on Carter's March promise of future cuts to making an explicit provision for a cut, giving a range of sizes instead of a particular number.
Whatever Carter does, it is known he will not make a detailed tax-cut proposal in July.
But the decision on what to do is a difficult one, as Treasury Secretary G. William Miller noted recently. Miller was quoted as saying the president "doesn't want to be crowded on this one."
Meanwhile, planning for the business tax cut is centering on increased depreciation allowances, which would have a relatively modest first-year cost in terms of lost revenue while providing businesses with a major incentive to increase their capital spending plans.
Depreciation is the expense a business claims each year as its capital assets -- such as a truck, a machine or a plant building -- gradually wear out. aDepreciation allowances are currently tied to the asset's original cost and its expected useful life, though under some "accelerated" depreciation schedules more of the original cost can be claimed in the early years of the asset's life, and less later on.
As a legitimate expense, depreciation allowances reduce a business's profits and therefore its income taxes. At the same time, the amount of money represented by depreciation is available to the business for reinvesting in new equipment or plants.
Increasing the amount of depreciation a business can claim for tax purposes, therefore, cuts its taxes and makes more money available for investment.
Since the higher depreciation allowances would be made available only for assets purchased in the future, the immediate loss of tax revenues would be small but grow very rapidly as new investments were made.
Reagan has endorsed a proposal made by several members of Congress that would greatly increase depreciation allowances by dropping the useful-life concept. Known as "10-5-3," the bill would allow business to write off investments in structures in 10 years, in equipment in five years and in autos and trucks in three.
Administration officials are opposed to "10-5-3," partly because it represents a larger tax cut than they think necessary, and partly because they are concerned it gives a significantly bigger break to industries with assets with very long useful lives -- a change that might skew the whole pattern of future business investment in an unproductive fashion.
But administration planners are not thinking small. It is known they believe it is impossible to get the very large impact on investment they think is needed while making only small changes in taxes.
Politically, the Republicans are sure to claim Carter is a Johnny-come-lately on the business tax-cut scene. But there are some shifts taking place in Reagan's tax policy proposals, too.
During most of the campaign, the former California governor backed a hard-line version of the Kemp-Roth tax-cut proposal to cut income taxes by 30 percent over a three-year period, come what may. After a number of economists, including some advising Reagan, said such an approach could lead to a new burst of inflation, the candidate began to back off. He now says the cuts should be phased in over "three years or more," and stresses that the cut for 1981 would be only $19.5 billion.
Sometime during the campaign-- perhaps as early as the August Democratic National Convention -- Carter plans to make a major economic policy address in which he will outline his view of the nation's economic future. Overall, it likely will focus on how the United States can once again achieve noninflationary economic growth.
Presumably, some details of the tax-cut package with its emphasis on boosting investment to help achieve growth without inflation, would be outlined in such a speech.
If Carter waits until the fall, he may be able to say with certainty that the recession is about to hit bottom and point to major progress against inflation, according to the administration's new forecast.
Unemployment will likely be between 6 and 8.5 percent and still rising slowly compared to the 7.2 percent rate predicted for the fourth quarter when the administration made public its last forecast in March.
At the same time, news on the inflation front should be much better, at least temporarily. Once the May and June increases in the consumer price index are out of the way -- the latter will be reported July 23 -- there should be a string of several months with the CPI rising at only a 6 to 8 percent annual rate, the forecase indicates.
However, improvement on that scale can only be temporary so long as wages are rising as rapidly as they have been and productively increases -- which offset the inflationary impact of higher wages -- are small or non-existent, the analysis shows.