Economic Report of the President

to yield approximately $13 billion in fiscal 1982 and larger amountsthereafter.The tax reductions embodied in the ERP will not totally offset increasesin other taxes. Social security taxes, the windfall profits taxon oil company revenues, and inflation-induced increases in personaltaxes will combine with the proposed motor fuels tax and withholdingof tax on interest and dividends to produce a rising tax burden in1981 and 1982 despite the ERP. In addition, even with the budgetedacceleration in defense spending and continued increases in interestoutlays, overall growth in Federal spending will be relatively modestin real terms. Thus, the high-employment surplus is expected to increasesubstantially in both 1981 and 1982, helping to moderatedemand and lower inflation.The Economic Revitalization ProgramThe major focus of the ERP is on increasing investment and encouraginginnovation. Depreciation rules would be both liberalizedand simplified under the plan. This would increase the rate of returnon new investment and the cash flow of firms making investments.The program would also make the current investment tax credit(ITC) partially refundable. The ITG and accelerated depreciationproposals would be retroactive to January 1, 1981. These two proposalsare explained in detail in Chapter 1.To shift additional national resources into investment, a largerthan-usualshare of the funds available for tax reduction will have tobe devoted to investment incentives. But some other forms of taxrelief are both feasible and desirable. The President's program proposesthree principal areas of such relief. First, individuals and employerswould receive an income tax credit sufficient to offset the risein social security taxes which took place at the start of the year. Thistype of tax cut was chosen because it not only would reduce tax burdensbut also lower business costs and thus help modestly with ourinflation problem. Second, for workers who face a growing social securitytax burden but earn too little to pay income taxes, the programwould expand the earned income tax credit. This would morethan offset the increase in social security taxes for our lowest-paidworkers. Third, the program proposes a phased reduction in the taxburden on two-earner families by reducing the so-called "marriagepenalty" that taxes married couples with roughly equal incomes atrates higher than unmarried couples with the same incomes.These reductions in individual income taxes would not become effectiveuntil January 1, 1982. The program, as originally proposed inAugust 1980, had provided for implementation of these tax cuts immediatelyupon passage. The delay in the effective date is dictated bybudgetary prudence and the desire to avoid rekindling inflationary166