ECONOMIC

2. Tax reduction should be permanent rather than in the form of atemporary rebate. The primary objectives of tax reduction in the currentsituation should be to provide relief from the inflation-induced increases inreal tax burdens and to support a lasting economic expansion. Because consumersnormally adjust expenditures to their "permanent" or long-runincome, a lasting reduction in personal taxes which raises both current andfuture after-tax income should yield a sustained rise in consumer spending,as happened following the permanent tax reduction in 1964. Sustainedgrowth in consumer spending is required to promote a durable economicexpansion.On the other hand, any stimulative effect that a temporary tax rebatemay have on consumer spending will diminish quickly. For example, a substantialincrease in expenditures for durables did occur after the paymentof the 1975 rebate. Part of the effect of such a one-time windfall, however,may have been to shift some expenditures to the present that had beenplanned for a later time, with the result that spending would be correspondinglylower in subsequent periods. This phenomenon may be thereason for the very low rates of increase in purchases of consumer durablesin the last 3 quarters of 1976. Such fluctuations in the movements of demandcontribute to uncertainty about fiscal policy and damage the prospects forsteady growth. Thus temporary tax rebates are not consistent with theobjective of sustaining an economic expansion. While they may be useful inhelping to bring about a reversal of generally declining demands during arecession, they are not consistent with the maintenance of an expansion ofdemand that is already under way.Moreover transitory increases in consumer spending associated with temporarytax cuts are not likely to stimulate investment as much as more permanentincreases in demand would do. Business firms may realize that anexpansion in sales will not last if the increase is apparently due to a temporaryreduction in taxes and will have less incentive to expand capacity than if theyexpect a more sustained rise in sales. A permanent reduction in incometaxes has a more lasting impact on household consumption demand andconsequently on business firms' willingness to invest in productive capital.It is sometimes argued that tax cuts should be temporary in order to maintaina permanent revenue base for future spending programs. A strongand more certain growth in 1977 and beyond, however, is ultimately thekey to whether resources will become available to support these expenditures.Moreover taxes automatically increase faster than income over time becauseof the combined effects exerted by inflation, real growth, and ourgraduated tax rate structure. Unless permanent reductions are made fromtime to time, taxes will account for an ever larger share of taxable income.Thus there is little danger that a permanent tax reduction will destroythe revenue base for the Federal Government. Indeed, another fear maybe more realistic: if taxes are not reduced periodically we run the risk ofallowing the tax burden to rise over time and thus inhibit the growth ofdemand in the private sec cor.26