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Carter further insisted that a tax cut of $25 billion, effective Oct. 1, is needed to create jobs, and that it "would not be inflationary." Since only 82% of the nation's production capacity is being used, he asserted, inflation is not being caused by the excess demand that would be aggravated by big budget deficits, but rather by "a cycle of wage increases, price increases that kind of grow on one another." Within hours, he had a congressional answer of sorts: in a preliminary vote on the budget for fiscal 1979, the Senate decided, 65 to 22, to leave room for a tax cut of only $20 billion. Ullman, who briefed Treasury Secretary W. Michael Blumenthal on the bleak prospects for the President's bill over breakfast last week, advocates only $15 billion.
There is little doubt that Congress will legislate some kind of income tax cut this year. And there is still some support in the business and academic communities for a tax cut as large as Carter wants, or even more, as a way to expand consumer buying power and provide companies with larger after-tax profits to invest. Even many of the big-cut advocates would like to see a large chunk of the $25 billion come not out of individual income and corporate-profits taxes, but out of Social Security taxes that are scheduled to shoot up next Jan. 1 and in succeeding years. One reason: the portion of Social Security taxes levied on employers raises their cost of hiring workers, and companies pass those costs on in higher prices. For the moment, however, Congress seems content to postpone a debate on Social Security taxes until next year and do this year's cutting on income taxes.
But when should the tax cut take effect? Federal Reserve Chairman G. William Miller was the first to suggest putting off the date from Oct. 1 to Jan. 1, as a means of lopping $9 billion off the fiscal 1979 deficit. Republican Economist Murray Weidenbaum, an advocate of Carter's $25 billion tax cut, disagrees. Whatever reductions are enacted, he says, should take effect at the start of the Christmas-shopping season to spur retail sales and end 1978 on an upbeat note. But Miller's proposal is gaining ground.
As for the size of the cut, the ruling consideration is how large a budget deficit the U.S. can tolerate. If the deficit is not reduced below $61 billion, Miller has warned, the Federal Reserve will restrict the money supply and raise interest rates as an alternative way of fighting inflation. The Fed already has moved twice in the past two weeks to tighten up; last week, in response, Chase Manhattan Bank raised its prime rate on business loans a quarter point, to 8¼%. Democratic Economist Otto Eckstein says that a $25 billion tax cut would be "guaranteed to fail" if it leads to a tighter money policy. He favors both delaying the cut until Jan. 1 and shrinking it to $20 billion.