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DECEMBER 24, 1965
10:30 A.M. FRIDAY
MR. PRESIDENT:

HERE IS ANOTHER MEMORANDUM FROM WALTER HELLER WHICH I SEND TO
YOU. THE SUBJECT IS THE PROS AND CONS OF A TAX INCREASE IN
1966.
TEXT FOLLOWS
DECEMBER 22, 1965
MEMORANDUM FOR THE PRESIDENT
1 THE GNP AND BUDGET NUMBERS ONE CAN NOW GUESS AT FOR NEXT
.
YEAR— ON THE BASIS OF PUBLISHED REPORTS AND THEIR IMPLICA­
TIONS-- SEEM TO CALL FOR A TEMPORARY TAX BOOST TO FINANCE
VIETNAM AND WARD OFF INFLATION.
2. STARTING WITH A STRONG 4TH QUARTER GNP OF AROUND $690
BILLION, MY FORECASTING ASSOCIATE HERE AT MINNESOTA (GEORGE
PERRY) SEES ABOUT $725 BILLION OF DEMAND (GNP) BUILDING UP
FOR 1966s <«
. THE COMMERCE-SEC FIGURES SUGGEST A WHOPPING INCREASE IN
PLANT AND EQUIPMENT EXPENDITURES.
. THE $105-$107 BILLION BUDGET NUMBERS FOR FY 1966-- ABOUT
$10 BILLION ABOVE FY 1965--IMPLY A FURTHER RISE TO PER­
HAPS $113 BILLION IN FY 1967 (AND THE PUBLIC TALK OF A
$60 BILLION DEFENSE BUDGET FITS INTO THIS).
. ADD IN THE EXPECTED BEHAVIOR OF CONSUMERS, INVENTORIES,
EXPORTS, AND STATE-LOCAL GOVERNMENTS, AND OUR FINE RECORD
OF PRICE STABILITY WILL BE THREATENED BY ECONOMIC OVER­
HEATING.
(&) LET ME EMPHASIZE THAT PERRY WORKED ENTIRELY FROM PUBLIC
SOURCES--SURVEYS, STATISTICS, AND NEWS STORIES— SO THESE ARE
INDEPENDENT, BUT REASONABLE, GUESSES OF HIS OWN. ON POLICY,
I HAVE NOT CONSULTED GARDNER, BUT I JUST READ HIM MY RECOM­
MENDATIONS OVER THE PHONE, AND I’M SENDING HIM A COPY OF THIS
MEMO.
3. SO 1966 IS THE TIME TO SWITCH, TEMPORARILY, FROM EXPANSION
TO RESTRICTION. IN FISCAL POLICY:
. PART OF THE JOB CAN BE DONE BY GRADUATED WITHHOLDING AND
THE LIKE.
. BUT WE SHOULD BE READY TO FACE UP TO A TEMPORARY INCREASE
IN RATES.
v
4. ALTHOUGH I DON'T KNOW WHAT SIZE TAX BOOST MIGHT BE NEEDED,
I THINK SOME OF THE OTHER "SPECS," BOTH ECONOMIC AND POLITICAL,
ARE CLEAR. ANY 1966 TAX INCREASE HAS TO BE:
. TIGHTLY TIED TO VIETNAM (BOTH IN CONGRESS AND IN THE
PUBLIC MIND)
—

BY NAME, E.G., "DEFENSE SURTAX," "FREEDOM SURTAX,"

—

BY TIMING, E.G., LIMITING IT TO THE DURATION OF THE
WAR.

-- BY PRESENTATION, E.G., PUTTING IT IN A SEPARATE VIET­
NAM BUDGET, MESSAGE, AND FINANCING PROGRAM.
. QUICK
-- THE UPSURGE OF COSTS, DEMAND, AND INFLATIONARY DANGER
IS EVEN BIGGER IN THE FIRST HALF OF 1966 THAN IN THE
SECOND, THE WAY THINGS NOW LOOK.
—

A QUICK TAX BOOST EARLY IN THE SESSION WILL BE LESS
OF A SLEDGEHAMMER FOR YOUR OPPONENTS TO POUND THE
GREAT SOCIETY INTO THE GROUND WITH.

--

THE LONGER WE’VE BEEN ACCUSTOMED TO A TAX HIKE BY
NOVEMBER, 1966, THE BETTER.

c o p y




-- BY PRESENTATION, E.G., PUTTIM IT IN A SEPARATf VIETNAM BUDGET, MESSAGE, AND F E N C I N G PROGRAM.
QUICK
-- THE UPSURGE (3K.COSTS, DEMAND, AND
iflTIONARY DANGER
IS EVEN BIGGER>& THE FIRST HALF OFy 366 THAN IN THE
SECOND, THE
TIN^GS NOW LOOK.
A QUICK M X BOOST EARlXlN THE/SESSION WILLNBE LESS
OF A SL2DQEHAMMER FOR YOUR OPPONENTS TO POUNDNCHE
GREAT/SOCIETY INTO THE GROiJfp WITH.
TpT LONGER WE’VE BEEN ACC/STC £D TO A TAX HIKE BY
3VEMBER, 1966, THE BETTER.
SIMPLE
—

WE DON'T WANT TO GET BOGGED DOWN IN MONTHS OF DEBATE
OVER A COMPLEX EXCESS PROFITS TAX, OR FANCY RATE
CHANGES, OR A MAZE OF EXCISES.

. TEMPORARY
-- IT MUST BE EASY TO DROP, SO IT CAN HELP US MAKE THE
ECONOMIC TRANSITION WHEN VIETNAM ENDS.
. ACROSS-THE-BOARD
—

ALL SHOULD SHARE IN THE COST, SACRIFICE, AND SENSE OF
PARTICIPATION IN VIETNAM.

-- CORPORATIONS SHOULD GIVE UP SOME OF THEIR VIETNAMASSOCIATED PROFITS, AND INDIVIDUALS SHOULD GIVE UP
SOME OF THEIR INFLATIONARY POWER.
. PROGRESSIVE
—

THE RELATIVE BURDEN SHOULD BE HEAVIER ON THE UPPER
THAN ON THE LOWER INCOME GROUPS.

5. TREASURY AND CEA EXPERTS MAY SEE OTHER "SPECS" AND ANGLES
THAT I AM MISSING, BUT IF MY LIST IS VALID: ,
. IT CAN BEST BE MET BY A STRAIGHT SURTAX ON BOTH CORPORATE
AND INDIVIDUAL INCOME TAXES.
. EACH PERCENT WOULD RAISE NEARLY $800 MILLION, SO A 5
PER CENT SURTAX, FOR EXAMPLE, WOULD PRODUCE NEARLY 4
BILLION A YEAR.
6. THOUGH AN EXCESS PROFITS TAX HAS POLITICAL APPEAL, IT
SHOULD BE A LAST RESORT:
. IT’S A CLUMSY AND INEFFICIENT DEVICE— THE KOREAN EXCESS
PROFITS TAX WAS ALMOST A SHAMBLES BY THE TIME IT WAS
REPEALED.
. MOST OF THE PROFITS TODAY ARE HIGH-PROSPERITY PROFITS,
NOT WAR PROFITS--A VIETNAM "EXCESS" WOULD BE HARD TO
FIND AND ISOLATE.
. PROCUREMENT PRACTICES UNDER MCNAMARA ARE TIGHTER THAN
EVER— AND WE CAN ALWAYS PROVIDE FOR RENEGOTIATION IF
WE NEED IT.
WALTER W. HELLER
P.S. AS TO THE JAN.. EXCISE TAX CUTS, I’D LET THEM GO:
1
. MOST OF THEM ARE LOUSY TAXES.
. THE CUTS WILL REDUCE THE CPI BY ABOUT 3/10 OF A PER CENT
IF THEY’RE PASSED THROUGH TO CONSUMERS.
. THE CUTS WILL HELP REDUCE BUSINESS COSTS.
DTG: 24/1556Z DEC 65
COPY

LBJ

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