Tape 110 - The new McGovern economics program
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| - | Welcome once again as MIT professor Paul Samuelson | 0:02 |
| discusses the current economic scene. | 0:05 | |
| This bi-weekly series is produced by | 0:07 | |
| Instructional Dynamics Incorporated | 0:09 | |
| and was recorded September 11, 1972. | 0:11 | |
| - | As we move into the business new year, | 0:16 |
| there are almost too many topics to comment on. | 0:17 | |
| This is the month of the annual meetings | 0:22 | |
| of the International Monetary Fund and the World Bank. | 0:26 | |
| The problem of negotiating a new system after | 0:29 | |
| the Smithsonian temporary synthesis will be with us. | 0:33 | |
| This will be discussed in Washington. | 0:39 | |
| All over the world people are watching this situation. | 0:41 | |
| Be well to say a few words on that. | 0:44 | |
| The election continues to boil. | 0:47 | |
| And finally, | 0:52 | |
| the question that I am receiving | 0:53 | |
| more and more is: | 0:54 | |
| what is the reasoned longevity of the present recovery? | 0:56 | |
| No one can be in doubt that broadly speaking, | 1:03 | |
| since the time of the New Economic Program, | 1:08 | |
| August 15 1971, | 1:12 | |
| the date of the Nixon shock, | 1:16 | |
| the inconvertibility of gold, | 1:17 | |
| the price wage controls. | 1:20 | |
| That what was a very anemic economic recovery, | 1:22 | |
| one of the most anemic in the annals of our history, | 1:26 | |
| not one which was inexplicably anemic | 1:33 | |
| because all of the general gross national product models | 1:37 | |
| correctly forecast the degree of its weakness, | 1:41 | |
| but that's now ancient history. | 1:47 | |
| In the last recorded three quarters, | 1:51 | |
| real output has averaged a rate of growth that is | 1:55 | |
| on the order of magnitude of 7%. | 2:00 | |
| The last reported number is itself above 9%. | 2:03 | |
| The rate of price increase is | 2:06 | |
| as last recorded, | 2:12 | |
| down unbelievably on the GNP Overall Deflator to below 2%. | 2:13 | |
| This ration of good news is beyond | 2:20 | |
| that which was indicated in the patterns of experience. | 2:26 | |
| You know that there have been economists | 2:34 | |
| who have been of the general view, | 2:36 | |
| that the slow down in the American economy, | 2:38 | |
| which was engineered in '69 and '70, | 2:43 | |
| would have its fruits in improved inflation performance. | 2:46 | |
| I have collected quite a number of estimates | 2:52 | |
| based upon such reasoning, | 2:55 | |
| but none of them show the precipitous discontinuity | 2:57 | |
| between the pre-August 15th experience | 3:01 | |
| and the post-August 15th experience | 3:04 | |
| that the reported index numbers of crisis show. | 3:08 | |
| Now there are several possibilities. | 3:12 | |
| One possibility is that the reported index numbers | 3:14 | |
| of prices are in some sense biased | 3:16 | |
| and that we will learn that only the symptoms | 3:20 | |
| of inflation have been suppressed. | 3:23 | |
| I've been looking for the evidence | 3:26 | |
| which would be conducive towards that view point | 3:27 | |
| and so far there has not been much brought forward | 3:30 | |
| in the way of cogent evidence. | 3:34 | |
| Another possibility is that we're having a reconfirmation | 3:37 | |
| of the view which very many economists hold, | 3:42 | |
| which is that in the very short run, | 3:47 | |
| price and wage controls can be remarkably effective, | 3:48 | |
| particularly if so to speak | 3:52 | |
| they're working with nature and not against nature. | 3:54 | |
| So there's a very favorable interaction | 3:57 | |
| between the controls. | 4:00 | |
| People are never satisfied just to sit with good news. | 4:04 | |
| They always want to go on to the next problem, | 4:07 | |
| and the next problem that is coming up is will it last? | 4:10 | |
| This I may say is a very important | 4:15 | |
| consideration for the stock market. | 4:16 | |
| The stock market has been chomping at the bit | 4:20 | |
| as far as the Dow Jones Industrial Average is concerned, | 4:23 | |
| just below the magic figure of 1000, | 4:26 | |
| the level to which it had marched up | 4:29 | |
| and almost reached in 1966, | 4:33 | |
| and again last year, | 4:38 | |
| and this year again is knocking at the door. | 4:41 | |
| Now the level of 1000 on the Dow Jones Index | 4:44 | |
| lends drama to life, | 4:48 | |
| and the people watch it. | 4:51 | |
| And it is significant for me to talk about it, | 4:53 | |
| because people think it's significant. | 4:55 | |
| But if we go above 1000, | 4:57 | |
| there'll be a broader significance | 5:00 | |
| then that you've smashed an Olympics record. | 5:02 | |
| The broader significance is that the market | 5:07 | |
| is at an all time high. | 5:10 | |
| The Dow Jones Index is a tired, | 5:13 | |
| old index of 30 blue chip stocks, | 5:17 | |
| so called blue chip stocks, | 5:21 | |
| once blue chip stocks. | 5:22 | |
| When it returns to 1000, | 5:25 | |
| it means that the more comprehensive index numbers of prices | 5:26 | |
| which a scientific observer should take note of, | 5:30 | |
| are beyond their 1966 level. | 5:33 | |
| Don't think that the Standard and Poor's Index | 5:37 | |
| has just returned to its 1966 level. | 5:38 | |
| Don't think that the comprehensive index | 5:41 | |
| of all the stocks that you can buy | 5:44 | |
| on the New York Stock Exchange weighted | 5:47 | |
| with the number of shares and their value outstanding, | 5:49 | |
| that that is just marching for the third time | 5:53 | |
| up to a peak level. | 5:56 | |
| On the contrary, | 5:59 | |
| because the Dow Jones Index is far and behind, | 6:00 | |
| when it hovers around 1000, | 6:03 | |
| the others are making some progression | 6:07 | |
| beyond previous levels. | 6:09 | |
| So the only significance of the Dow Jones level of 1000 is, | 6:11 | |
| will the bull market continue with a new vigor, | 6:18 | |
| or is the end in sight? | 6:25 | |
| Now the market, | 6:27 | |
| it's a banality to say so, | 6:29 | |
| must be future-oriented. | 6:31 | |
| Whether the present price earnings multiple | 6:34 | |
| of the comprehensive index numbers of stock prices | 6:40 | |
| are cheap, | 6:44 | |
| let's say a 15 to one or a 16 to one, | 6:45 | |
| depends upon how long those earnings are gonna last. | 6:48 | |
| If those are solid earnings which are going to last and grow | 6:50 | |
| then 15 to one may be the bargain of the generation. | 6:54 | |
| The market wants to know, | 7:00 | |
| in other words, | 7:01 | |
| whether the corporate profit performance | 7:02 | |
| which this year looks to show a growth of a sixth or a fifth | 7:07 | |
| perhaps if you're a great optimist, | 7:15 | |
| over a fifth, | 7:17 | |
| that means in the general range | 7:18 | |
| of 15 to 23% after tax profits, | 7:21 | |
| whether that's gonna be followed by another such year. | 7:25 | |
| So the questions that I receive from people, | 7:31 | |
| when I report on different computer forecasts and so forth, | 7:36 | |
| is shifting from what's gonna happen | 7:39 | |
| between now and the election to | 7:43 | |
| what's going to happen 15 months after the election? | 7:45 | |
| That's what the market wants to form a judgment on | 7:50 | |
| in deciding whether to move up stock prices, | 7:53 | |
| hold them in a meandering way about where they are, | 7:56 | |
| or actually have the bubble deflated. | 7:59 | |
| Well I will report on some of the different forecasts | 8:06 | |
| and I think perhaps that should be | 8:10 | |
| my second order of business. | 8:14 | |
| My first order of business can be brief, | 8:16 | |
| since this is an election year. | 8:19 | |
| Since the last tape that I recorded, | 8:22 | |
| Senator George McGovern made his long awaited speech | 8:26 | |
| before the New York Society of Security Analysts, | 8:31 | |
| this was on August 29th 1972, | 8:34 | |
| I have the full text of the speech before me. | 8:36 | |
| It was very fully reported in the press, | 8:39 | |
| in fact a very distinguished securities analyst | 8:43 | |
| from the Chase Organization who was going to report | 8:48 | |
| on that fascinating experiment, | 8:51 | |
| which the Chase Bank has been carrying on, | 8:54 | |
| in which a number of chosen brokerage firms | 8:56 | |
| are invited to give the Chase Organization on paper, | 8:59 | |
| their portfolio recommendations. | 9:03 | |
| And then a computer keeps careful track | 9:06 | |
| of their various recommendations, | 9:09 | |
| this is done for real so to speak, | 9:11 | |
| and not just for fun, | 9:12 | |
| the cost of this particular contest, | 9:15 | |
| I believe runs over a million dollars. | 9:20 | |
| But the Chase Bank thinks it's worth it, | 9:23 | |
| because if they are able to isolate | 9:25 | |
| the better advisory services, | 9:27 | |
| then they can pay to give them the brokerage business. | 9:30 | |
| The brokerage firms are very much motivated to do this. | 9:35 | |
| And this has been reported on in the press, | 9:40 | |
| in the New York Times magazine section and elsewhere, | 9:44 | |
| and I'd like sometime to comment on it, | 9:46 | |
| because there is scientific interest in this approach. | 9:49 | |
| There also are some dangers in this approach, | 9:52 | |
| which only scientific analysis can unveil. | 9:54 | |
| Although security analysts were interested | 10:00 | |
| in hearing about that, | 10:01 | |
| they were more interested in having | 10:04 | |
| the wild man from South Dakota appear before them, | 10:06 | |
| see the real animal in the flesh, | 10:11 | |
| and learn what finally, | 10:12 | |
| his economic program was shaken down to. | 10:15 | |
| Some of you will have seen a brief analysis by me, | 10:22 | |
| on the so-called op-ed page of the New York Times. | 10:26 | |
| I received an invitation just recently | 10:30 | |
| to prepare on very short notice, | 10:34 | |
| an analysis of that. | 10:37 | |
| I was unwilling to do that on the basis of news reports, | 10:39 | |
| but I was able to get a hold of the text, | 10:44 | |
| and I did provide such an analysis. | 10:46 | |
| I was not told that simultaneously there would appear | 10:49 | |
| an analysis of McGovern economics | 10:52 | |
| by a White House spokesman, | 10:55 | |
| Robert Finch turned out to be the man, | 10:57 | |
| but that was fair enough because there was nothing I said | 11:02 | |
| that I would have had any reason to write differently. | 11:07 | |
| If I had known that this was to appear in a debate format, | 11:11 | |
| and actually anyone who has read the two pieces, | 11:16 | |
| will realize that they run perpendicular to each other. | 11:20 | |
| What I did was to analyze what I am now | 11:24 | |
| informed is the final shape | 11:31 | |
| of Senator George McGovern's economic program. | 11:35 | |
| Robert Finch chose to discuss the vacillations | 11:40 | |
| in announced versions of that program in the past | 11:47 | |
| as announced by various McGovern staff people, | 11:52 | |
| and by the candidate himself. | 11:56 | |
| Well let's turn to the program. | 12:01 | |
| I may say that it isn't clear | 12:06 | |
| how the speech was received. | 12:09 | |
| I believe from McGovern headquarters' standpoint, | 12:14 | |
| it was received well. | 12:18 | |
| The candidate obviously was not talking | 12:21 | |
| to the people in that room only, | 12:24 | |
| this was a springboard from which his message, | 12:26 | |
| would reach the rest of the country. | 12:28 | |
| There was a goodly crowd, | 12:30 | |
| and the purpose one presumes, | 12:32 | |
| was not to move very many votes in that auditorium itself, | 12:34 | |
| because most of those votes could be presumed to be | 12:39 | |
| for the republican party. | 12:44 | |
| And those which weren't, | 12:47 | |
| would presumably have already made up their mind. | 12:49 | |
| But this is telling the country about the program. | 12:51 | |
| Well I learned a lot from this, | 12:54 | |
| because I've been trying to piece together | 12:56 | |
| the definitive final form of the McGovern program. | 12:59 | |
| The single most important thing, | 13:05 | |
| which the candidate, | 13:07 | |
| the democratic candidate for the presidency, | 13:09 | |
| enunciated there, | 13:11 | |
| was the shape of his new tax system. | 13:12 | |
| So in order to pave the way for a more detailed discussion | 13:17 | |
| of the tax program, | 13:21 | |
| let me mention very briefly | 13:22 | |
| the other features that he did talk about. | 13:25 | |
| First there was a reduction in military spending. | 13:30 | |
| This now takes the shape of a reduction | 13:34 | |
| of ten billion dollars per year for the next three years. | 13:37 | |
| Seems to me this is a much more realistic proposal | 13:41 | |
| than cutting out 32 billion dollars | 13:45 | |
| of defense spending in one fell swoop, | 13:47 | |
| if that ever was the serious considered proposal | 13:49 | |
| of the democratic candidate. | 13:55 | |
| And over the years, | 13:57 | |
| living here at MIT, | 13:59 | |
| being a consultant of Rand, | 14:01 | |
| I have had various insights into how much fat | 14:03 | |
| there actually is inevitably, | 14:11 | |
| in the Pentagon budget. | 14:14 | |
| And I'm not talking about a Nixon Pentagon budget, | 14:16 | |
| I'm speaking about a Johnson Pentagon budget | 14:17 | |
| and a Kennedy Pentagon budget. | 14:21 | |
| We have been fighting off for years, | 14:25 | |
| proposals that make no military sense. | 14:27 | |
| I'm thinking of manned bombers, | 14:31 | |
| so that flight officers can play games, | 14:34 | |
| can pilot them, | 14:39 | |
| although every technologist knows | 14:41 | |
| that these manned bombers are sitting ducks | 14:44 | |
| for guided Soviet missiles. | 14:47 | |
| To believe that it would be impossible | 14:51 | |
| to cut out ten billion per year for three years | 14:55 | |
| in the military budget by cutting out fat, | 14:58 | |
| and leaving muscle impaired, | 15:01 | |
| is to show a lack of knowledge | 15:04 | |
| of the true facts of the situation, | 15:07 | |
| I think. | 15:10 | |
| McGovern, | 15:11 | |
| who has by the way, | 15:13 | |
| advisors with Pentagon experience, | 15:14 | |
| is shifting the emphasis as it should be shifted, | 15:17 | |
| I think, | 15:20 | |
| towards deterrents by means of missiles | 15:21 | |
| projected from submarines. | 15:26 | |
| These are immovable, | 15:28 | |
| these provide realistic deterrents. | 15:30 | |
| They involve more money in one direction, | 15:33 | |
| but the money spent in that direction | 15:35 | |
| is well spent in terms of security, | 15:37 | |
| and permits of economies in other directions. | 15:40 | |
| So as I said in the Times, | 15:44 | |
| this particular proposal, | 15:47 | |
| even the Hawks could favor. | 15:49 | |
| I infuriated, | 15:52 | |
| by the way, | 15:53 | |
| a number of McGovern dove adherents | 15:54 | |
| who really don't want a rational discussion | 15:57 | |
| of this particular problem, | 15:58 | |
| because they think you're dealing here with evil. | 16:00 | |
| Second and very interestingly, | 16:04 | |
| Senator McGovern has apparently found | 16:07 | |
| that he just can't muster political support | 16:09 | |
| for a full-fledged negative income tax system. | 16:12 | |
| The notion that we will get rid of the welfare mess, | 16:16 | |
| and replace it by a rational reasoned, | 16:20 | |
| Internal Revenue Service administered program, | 16:23 | |
| with a minimum of red tape, | 16:27 | |
| which simply follows the guidelines | 16:29 | |
| that those of us who have incomes above certain levels | 16:33 | |
| pay positive income taxes in proportion | 16:37 | |
| to our excesses above those levels, | 16:39 | |
| and those below some defined poverty line, | 16:42 | |
| which is conditional upon the family composition, | 16:46 | |
| number of children, | 16:50 | |
| age so forth, | 16:51 | |
| that they should receive | 16:52 | |
| negative taxes, | 16:58 | |
| that is receive positive transfers | 16:59 | |
| in some reasonable proportion to the discrepancy | 17:02 | |
| between the incomes that they are able | 17:06 | |
| to earn for themselves, | 17:08 | |
| and at minimum level. | 17:10 | |
| That is a very rational notion. | 17:13 | |
| People differ on the details. | 17:17 | |
| It's a notion by the way, | 17:19 | |
| which Robert Finch, | 17:20 | |
| when he was Secretary of HEW, | 17:22 | |
| favored. | 17:25 | |
| He and Patrick Moynihan, | 17:27 | |
| with the help of George Schultz, | 17:29 | |
| worked out a formula which persuaded President Nixon | 17:33 | |
| to come out for it. | 17:37 | |
| Economists as diverse as Professor Milton Friedman | 17:38 | |
| at the University of Chicago, | 17:43 | |
| Professor James Tobin at Yale University, | 17:44 | |
| moving still further left, | 17:47 | |
| Michael Harrington, | 17:49 | |
| the socialist writer, | 17:52 | |
| have been in favor in principle, | 17:54 | |
| of the negative income tax. | 17:56 | |
| Senator McGovern felt, | 17:59 | |
| I guess, | 18:02 | |
| that he was being murdered in California, | 18:03 | |
| by this albatross of a thousand dollars a year per person, | 18:05 | |
| and the new income maintenance system. | 18:11 | |
| So politics being the art of the possible, | 18:15 | |
| he apparently has given in on this, | 18:19 | |
| and now is for federal aid | 18:21 | |
| for minimum maintenance conditions, | 18:26 | |
| but working through the present state welfare systems. | 18:29 | |
| To me that is a tactical retreat. | 18:36 | |
| I don't think it represents lack of principle, | 18:42 | |
| I say this of any candidate, | 18:45 | |
| whether it be President Nixon or Senator McGovern, | 18:48 | |
| I don't think it shows pandering to public opinion, | 18:51 | |
| I don't think it shows indecisiveness, | 18:58 | |
| I think it shows a realistic appraisal | 19:00 | |
| of the feasibility at this time. | 19:03 | |
| I hope that as more elections come down the pike | 19:07 | |
| that that situation will change. | 19:11 | |
| Thirdly, | 19:17 | |
| and there's nothing remarkable about this, | 19:18 | |
| because whoever had been named the democratic candidate, | 19:20 | |
| whether it would be Hubert Humphrey or Senator Jackson, | 19:24 | |
| or Senator Muskie, | 19:27 | |
| all of them are on record as in favor of this, | 19:29 | |
| the government is to be a provider | 19:35 | |
| of last resort employment to those who are able to work, | 19:39 | |
| who are willing to work, | 19:44 | |
| but are unable to find private employment opportunity | 19:46 | |
| after a certain interval of search. | 19:49 | |
| Well those proposals did not make the headlines. | 19:54 | |
| What did make the headlines, | 19:59 | |
| and what occupies most of this speech, | 20:01 | |
| and what interests me here to analyze, | 20:03 | |
| are the various parts of the tax programs. | 20:07 | |
| First I want to say, | 20:10 | |
| that to me the present tax program | 20:13 | |
| is a great improvement. | 20:17 | |
| It's a great improvement over what earlier, | 20:20 | |
| I deduced was the shape of Senator McGovern's tax program. | 20:24 | |
| It's a great improvement over our present | 20:30 | |
| federal tax program, | 20:33 | |
| and it's a great improvement over our federal tax program | 20:36 | |
| as it will be modified by the proposals, | 20:40 | |
| which the current administration | 20:45 | |
| has been studying now for about 18 months. | 20:47 | |
| Broadly speaking it.... | 20:51 | |
| represents a great simplification of the tax program. | 20:55 | |
| I've written before that on August 15th 1971, | 21:02 | |
| the president stole a march, | 21:09 | |
| stole the clothes, | 21:11 | |
| stole the thunder, | 21:12 | |
| of the democratic opposition, | 21:13 | |
| in going far beyond what any of them | 21:15 | |
| seriously proposed to do in the direction of incomes policy. | 21:19 | |
| And apparently he has gained at the public opinion polls, | 21:23 | |
| tremendous brownie points for doing so. | 21:30 | |
| In the same way here, | 21:34 | |
| it seems to me that Senator McGovern | 21:36 | |
| has stolen a march on the president. | 21:38 | |
| Because he has come out with the platform | 21:42 | |
| that the maximum federal income tax | 21:48 | |
| that anybody should have to pay ever, | 21:52 | |
| on any dollar of his income is 48 cents. | 21:56 | |
| You'd almost expect this to come from a republican, | 21:59 | |
| and not from a democrat. | 22:01 | |
| I presume the 48% top marginal number | 22:03 | |
| came from an identity, | 22:08 | |
| not by the way a very well founded one in my opinion, | 22:12 | |
| between the 48% corporate tax rate. | 22:15 | |
| If corporations are to pay 48 cents on their last dollar, | 22:19 | |
| then individuals would have to pay more than that. | 22:24 | |
| That's not a good analogy, | 22:26 | |
| because the corporation I believe to be | 22:27 | |
| an entirely different kind of object | 22:29 | |
| of taxation from individuals. | 22:31 | |
| And there's a lack of comparability | 22:33 | |
| between the quantitative burden put on one and on the other. | 22:34 | |
| But it has a ring, | 22:38 | |
| it's less than 50%, | 22:39 | |
| and I have found in discussing these matters | 22:41 | |
| with the man in the street, | 22:45 | |
| that he has some kind of an irrational attachment | 22:47 | |
| for 50-50, | 22:51 | |
| and thinks anything above 50-50 is getting dangerous | 22:52 | |
| in government taxation. | 22:56 | |
| The simplification comes about | 22:58 | |
| because the tax base is enlarged | 23:01 | |
| by cutting out loopholes. | 23:04 | |
| And if the tax base is enlarged, | 23:07 | |
| cutting out loopholes, | 23:10 | |
| and if the same expenditure is to be met by taxation, | 23:11 | |
| then rates generally can be lowered. | 23:15 | |
| Senator McGovern said at this meeting, | 23:21 | |
| that nobody who works, | 23:22 | |
| and this includes the chairman of the board, | 23:24 | |
| and the president and all the vice presidents | 23:27 | |
| as well as the blue collar worker on the assembly line, | 23:30 | |
| nobody who works, | 23:33 | |
| under his proposal, | 23:34 | |
| will pay higher federal tax than under existing | 23:35 | |
| a law under Nixon proposals. | 23:40 | |
| In fact they will pay a lower, | 23:43 | |
| he's referring in part here I suppose, | 23:45 | |
| to the 50% limit, | 23:48 | |
| which was put into law during the Nixon administration | 23:49 | |
| on earned income as a maximum marginal rate. | 23:53 | |
| Moreover if you aren't already living by, | 24:01 | |
| as I wrote for the New York Times, | 24:07 | |
| breathing through tax loopholes, | 24:09 | |
| this appeared in print as "breezing through tax loopholes." | 24:12 | |
| I decided it read just as well one way as the other, | 24:15 | |
| but that hadn't been my intention. | 24:17 | |
| Then you're gonna be better off under this new program | 24:21 | |
| even if you are a rentier, | 24:24 | |
| even if you are a person living on property wealth. | 24:27 | |
| Now the number of people who actually benefit | 24:33 | |
| from tax loopholes, | 24:38 | |
| is small. | 24:40 | |
| The number of people who receive net benefit | 24:43 | |
| is smaller than that. | 24:46 | |
| Anyone who has made a study of tax shelters | 24:48 | |
| knows that the old statement of W.C Fields | 24:52 | |
| or P.T Barnum, | 24:56 | |
| that you can't cheat an honest man, | 24:58 | |
| remains true in varied form. | 25:01 | |
| The easiest sucker in the world, | 25:05 | |
| for a phony oil drilling deal, | 25:08 | |
| and I shouldn't say phony, | 25:10 | |
| because what happens is, | 25:12 | |
| and I know this from personal acquaintanceship | 25:14 | |
| with geologists, | 25:18 | |
| what happens is that the best oil prospects | 25:20 | |
| are kept for yourself and for your friends. | 25:24 | |
| The next best go to the large corporation | 25:27 | |
| with whom you do business all the time. | 25:30 | |
| Finally at the end of the line, | 25:33 | |
| are the suckers who think they're using | 25:35 | |
| government tax dollars. | 25:37 | |
| Well they are using government tax dollars, | 25:39 | |
| the benefit ends up practically nil for everybody. | 25:43 | |
| Unsound ventures in growing beef cattle | 25:47 | |
| in citrus groves, | 25:51 | |
| in oil, | 25:52 | |
| take place because everybody thinks | 25:56 | |
| it's the expense of the government. | 25:58 | |
| The government does lose, | 25:59 | |
| but the people themselves don't gain, | 26:01 | |
| and even competition among the sharpsters | 26:02 | |
| who provide tax shelter, | 26:05 | |
| reduces their profit down just to a normal return. | 26:07 | |
| It's what we economists call dead weight loss. | 26:10 | |
| Under this new proposal, | 26:14 | |
| Senator McGovern has concentrated on the important thing: | 26:17 | |
| he's dropped, | 26:19 | |
| thank the Lord, | 26:21 | |
| he obviously now is talking to Stanley Surrey, | 26:22 | |
| to Joseph Pechman, | 26:24 | |
| to people who've been through tax reform | 26:25 | |
| over the last two decades, | 26:28 | |
| and know the direction in which political suicide lies. | 26:30 | |
| He's dropped the notion that you're not | 26:33 | |
| to get deductible in your home mortgage. | 26:36 | |
| That if you put in the plate at church, | 26:39 | |
| 50 Sundays of the year, | 26:42 | |
| five dollars each Sunday, | 26:45 | |
| and that's a derisory percentage of your total income, | 26:47 | |
| you have no right to a charitable deduction. | 26:52 | |
| Only when you give money above | 26:54 | |
| let's say 3%, | 26:55 | |
| should you be allowed a charitable deduction. | 26:57 | |
| These are good proposals, | 27:00 | |
| don't misunderstand me. | 27:01 | |
| They would benefit us all if they were adopted, | 27:03 | |
| because we would have lower rates. | 27:06 | |
| But experience shows, | 27:08 | |
| you simply cannot persuade people | 27:09 | |
| that they would be better off under this. | 27:12 | |
| It's political suicide to continue along those lines. | 27:14 | |
| So what has Senator George McGovern done? | 27:16 | |
| What he's concentrated on are the main loopholes, | 27:20 | |
| and obviously the first main loophole | 27:22 | |
| is the capital gains loophole. | 27:25 | |
| He has proposed, | 27:27 | |
| this is on a gradual basis, | 27:28 | |
| but by 1975 will be in the regime, | 27:30 | |
| that capital gains be taxed at ordinary rates, | 27:33 | |
| and very important, | 27:37 | |
| that at death, | 27:39 | |
| there be constructive realization. | 27:41 | |
| That means you can't avoid capital gains tax. | 27:43 | |
| These are not, | 27:46 | |
| by the way, | 27:47 | |
| radical proposals. | 27:49 | |
| My old teacher, | 27:50 | |
| Henry Simons at the University of Chicago, | 27:51 | |
| advocated those 35 years ago. | 27:53 | |
| Every treasury, | 27:56 | |
| both under republic administrations | 28:00 | |
| and democrat administrations, | 28:03 | |
| the treasury officials have advocated | 28:05 | |
| these particular proposals. | 28:07 | |
| Moreover, | 28:10 | |
| most people haven't noticed this, | 28:12 | |
| because most people don't have heavy capital gains, | 28:14 | |
| but the capital gains marginal tax right now | 28:16 | |
| many of my listeners will know it full well, | 28:19 | |
| is 35% not the old 25%. | 28:22 | |
| So you go from 35% at worst to 48%. | 28:26 | |
| I won't dwell on percentage depletion, | 28:33 | |
| the capitalization of intangible expenses and so forth, | 28:36 | |
| those are details that are of more interest in Texas | 28:41 | |
| than they are generally speaking. | 28:43 | |
| But the capital gains makes the point, | 28:46 | |
| it's the difference between the tax rate | 28:52 | |
| on capital gains on ordinary income, | 28:54 | |
| which creates the great complexity in the tax law. | 28:55 | |
| Some people say "Well cut out the capital gains tax." | 28:59 | |
| That's the opposite. | 29:01 | |
| That adds to complexity. | 29:03 | |
| Because then you have to argue | 29:04 | |
| with Internal Revenue Service | 29:05 | |
| about your depreciation formula. | 29:06 | |
| It's by cutting out the differential between the two rates, | 29:08 | |
| every tax practitioner knows, | 29:10 | |
| that's the way that you simplify. | 29:12 | |
| So to overly dramatize things, | 29:14 | |
| you now can fire all those tax accountants and lawyers. | 29:17 | |
| You can go about the business | 29:21 | |
| of making better mousetraps and writing better poetry. | 29:23 | |
| It was truly said in the recent past, | 29:28 | |
| that a man of affluence, | 29:32 | |
| the best use of time he could make of his time, | 29:34 | |
| and his God-given ingenuity, | 29:36 | |
| was in reducing his tax burden. | 29:38 | |
| Under a McGovern program, | 29:41 | |
| that will not be the case. | 29:42 | |
| In fact, | 29:44 | |
| I'll make a prediction. | 29:44 | |
| I think that parts of this program | 29:46 | |
| are going to be picked up, | 29:48 | |
| they're so republican in their nature essentially, | 29:50 | |
| are going to be picked up in the end | 29:52 | |
| by whoever is the president elected in November. | 29:54 | |
| Well I guess we'll have to leave it for next time | 30:01 | |
| a discussion of the recent betting odds | 30:03 | |
| on the longevity of the revival. | 30:07 | |
| And also by then we'll know more perhaps, | 30:10 | |
| about the secret IMF report, | 30:13 | |
| which has already leaked out, | 30:15 | |
| on monetary reform and liquidity reform | 30:16 | |
| in our international mechanism. | 30:20 | |
| - | If you have any comments or questions | 30:23 |
| for Professor Samuelson, | 30:25 | |
| address them to Instructional Dynamics Incorporated | 30:26 | |
| 166 East Superior Street, | 30:29 | |
| Chicago Illinois, | 30:31 | |
| 60611. | 30:33 |
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