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36 Tax Foundation's Tax Review 1 (1975)

handle is hein.tera/tafoutaxt0039 and id is 1 raw text is: Tax Review JANUARY, 1975 %4 Vol. XXXVI. No. 1 Capital Needs, Profits, and Inflation By Norman B. Ture The subject of this Conference, Tax Revision in an Inflationary Era, has an ominous sound, imply- ing that we must resign ourselves well into the future to a soaring price level. Hopefully, we will not accept the view that this inflation cannot be brought under control or that we must resort to such demonstrably ineffective, distorting measures as price and wage controls. Inflation is not a natural state of affairs or an inevitable consequence of the normal operation of a market-oriented, private enterprise economy. It is the result, rather, of bad public policies. Public policies don't have to be bad, of course, and we all live in hopes that they will improve. If they do, in- flationary forces will be contained, and although we would all have to remain on the alert to prevent a return to policies generating a resurgence of infla- tion, we would not have to concern ourselves with policies appropriate to an era of inflation. Inflation, as any man in the street knows - and as most economists used to know - is the result of too much money chasing too few goods and services. An excessively rapid growth of the stock of money doesn't just happen, however, in our monetary sys- tem. It is, rather, the consequence of the policies and operations of our monetary authority, the Board of Governors of the Federal Reserve System. While the Fed must surely bear its full share of responsibility for excessive monetary growth and the inevitable in- flationary consequences, it is not solely at fault. In- deed, the Fed's policy freedom has been severely constrained by Federal budgetary and fiscal policies over which it has little direct control. There is, there- fore, much truth in the familiar claim that the real source of our inflationary woes is the explosion of Federal spending over the last several fiscal years. Until Federal spending growth is brought under control, the pressures from fiscal and budgetary poli- cies for a highly expansionary and inflationary mone- tary policy will continue. In the past nine fiscal years the Federal Govern- ment has spent almost $1.8 trillion. This is twice as much as the total of Federal outlays in the preceding 10 fiscal years. Of this $1.8 trillion, almost $1 trillion were spent during the past four years. In retrospect, it seems hardly reasonable to expect that this enormous amount of Federal outlays would have been entirely financed by taxes, and of course, it wasn't. Over the past nine fiscal years, the aggre- gate deficit (net of a small-surplus in one year) was $101.2 billion, two-thirds of it-$64 billion-in the last four years. In the nine years from the end of 1964 through 1973, the stock of money increased by about $108 billion, at an annual rate of 5.8 percent; of this in- crease, $63 billion took place in the last four years, when the stock of money was growing at an annual rate of 6.8 percent. In the nine years from 1964 through 1973, the Con- sumer Price Index increased by 43 percent; it in- creased by more than 22 percent in the four last This Issue In Brief Inflation demands an about face in U.S. tax policy, the author says, but this is not the appropriate time for broad-scale tax reduc- tions aimed at bolstering consumption to combat recession. He explains how changes in the tax system to remove its built-in bias against saving would better serve the inter- ests of all Americans. Copyright 1975 by Tax Foundation, Inc., 50 Rockefeller Plaza, New York, N.Y. 10020, Judson 2-0880 1

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