During his 1976 campaign for the presidency, Jimmy Carter had developed a populist message on taxes, repeatedly denouncing the federal revenue system as a “disgrace” and “a welfare program for the rich.” He promised sweeping reform, with a special (if vague) emphasis on closing “loopholes.”
Carter’s rhetoric struck a chord, judging by opinion polls and election results. It also yielded high expectations, as Carter promised to deliver on his pledge to reform the nation’s revenue system. Voters expected to see something sooner rather than later.
But it was definitely going to be later. To repurpose a quip from Irving Kristol, Carter’s plan for speedy tax reform was mugged by reality.
Carter’s initial foray into tax policy featured a stimulative tax cut, which included a rebate for individual taxpayers. This rebate flamed out quickly and rather spectacularly, bleeding support from within Carter’s own party. Indeed, the story of the failed rebate is emblematic of Carter’s broader failures in tax policy.
Recovery Over Reform
As Carter began his presidency, the U.S. economy was struggling. Inflation had cooled from its blistering pace in 1974 (11.1 percent) and 1975 (9.1 percent). But prices were still rising briskly; inflation had come in at 5.7 percent in 1976, and it was headed to 6.5 percent in 1977.
Worse, unemployment was high. After peaking at 9 percent in May 1975, it had dropped to 7.8 percent by the time of the 1976 election. It was still 7.5 percent as Carter took the oath of office, raising pressure on the new administration for a job-creating stimulus.
It was hardly a surprise, then, that Carter made a stimulative tax cut his first important tax proposal. On January 7, 1977, not quite two weeks before his inauguration, the president-elect announced a tentative outline for a two-year stimulus program, featuring new spending and various tax cuts.
Spreading his stimulus package over two years would give it time to work, according to Carter’s advisers and other sympathetic economists. Walter Heller, former chair of the Council of Economic Advisers under President John F. Kennedy, told the Senate Budget Committee that sustained efforts were vital. (Prior coverage: Tax Notes, Jan. 31, 1977, p. 9.)
“The two-year horizon of the Carter program avoids the hit-and-run pitfall of a one-shot program,” Heller said. “It combines the early tax boost to consumer demand (and through it, to investment) with a convincing follow-through of more slowly maturing programs. Similarly, it combines the indirect job stimulus of rising total demand with direct job creation. This steady stream of well-tempered stimulus is clearly preferable to a stop-and-go approach.”
The two-year horizon also promised to deliver political benefits. “By advocating a two-year program,” The New York Times observed, “Mr. Carter can simultaneously hold down the size of this year’s stimulus package to $15 billion, so as not to terrify fiscal conservatives, and also talk about a $30 billion program to those labor, black and other groups that believe that a governmental effort of that magnitude is necessary if the unemployment rate is ever, to be brought down significantly.”
In a January 31, 1977, message to Congress, Carter provided the details of his multifaceted program. Predictably, his plan for individual tax rebates got a disproportionate share of media attention.
Refundable Rebates
Carter proposed a three-part program of rebates and cash payments:
A one-time $50 rebate on 1976 taxes for individual taxpayers and each of their dependents. These rebates would cost $8.2 billion over two years.
A $50 refundable credit for each person in a family that was eligible for the earned income tax credit. These rebates would total $1.4 billion. (In a backhanded defense of this provision, the economist Arthur M. Okun told The New York Times that such payments were “more a matter of equity than economics.”)
A $50 payment to every beneficiary of Social Security, Supplemental Security Income, or railroad retirement. These one-time payments, Carter said, would cost $1.8 billion.
“These rebates are intended to provide prompt spending power to almost every American,” Carter said. Indeed, the IRS would start mailing checks five weeks after Congress passed the necessary legislation.
In exchange for the $11.4 billion spent on these rebates, administration officials hoped to see a meaningful decline in the unemployment rate — perhaps to 6.5 percent by the end of 1977, according to news reports.
Indeed, Carter viewed the rebates as a crucial element of his overall stimulus program. It was certainly the most politically salient component. “This rebate will inject money into the economic stream quickly,” he pointed out. “It will distribute its benefits widely, require little paperwork, be of particular help to low- and middle-income families, and use a formula the American people can easily understand.”
Who wouldn’t like that sort of program?
Immediate Opposition
Plenty of people, as it turned out. The New York Times captured the skepticism in an article that appeared before Carter even formally proposed the rebates. “Are the tax rebates on personal income taxes proposed by President Carter just short-lived ‘pep pills’ without any lasting effect on the economy?” the paper asked.
For many, the answer was yes. Critics immediately derided the rebates as expensive, ineffective, unnecessary, and inflationary.
One important and hostile skeptic was Federal Reserve Board Chair Arthur F. Burns. “As far as I can judge, the economy is improving on its own,” he told the House Banking Committee. “It’s not clear that any stimulus is needed at all.”
Even if that wasn’t true, the rebates were an especially bad way to jump-start growth, Burns continued. “The treasury does not have the money,” he said. “It has to go out and borrow it. It’s not a good habit for the treasury, the Congress or the country to get into. It’s not an efficient way to stimulate the economy.”
When Congress took up Carter’s recovery plan, the rebates got a cool reception. A staff member for the Democratic majority of the House Ways and Means Committee offered a warning in the form of faint reassurance. The rebate, he told a reporter on February 4, 1977, is “still very much a possibility.”
Not exactly a ringing endorsement. And not a good sign for a president just two weeks into his first term.
On February 17, the Ways and Means Committee narrowly approved the rebate provision. It nearly died, however, when several conservative Democrats joined Republicans in opposing it. And when the bill moved to the House floor, the rebate faced another challenge from a similar bipartisan alliance, surviving by a relatively narrow vote of 219 to 194. The House agreed, however, to limit the rebate to taxpayers making less than $25,000 annually — a decision that emphasized equity over stimulus, thereby undermining the original justification for the provision.
The writing was clearly on the wall.
Outside Congress the economic environment was growing more hostile to Carter’s rebate almost daily. Unemployment was ticking down, easing the particular economic fear that had prompted the rebate in the first place. At the same time, inflation was creeping up, raising a different worry: a demand-stimulating rebate might push prices even higher.
As it arrived in the Senate, Carter’s rebate was immediately imperiled. Even liberals were lining up against it. “It’s like shoveling money out of an airplane,” complained Sen. Floyd Haskell, D-Colo., who had decided to oppose the measure on the floor after voting to advance it in the Finance Committee.
By mid-April, before the Senate could kill the rebate itself, Carter pulled the plug. Advisers said the president had concluded that immediate stimulus was no longer necessary, thanks to an improving economy. And while these same advisers denied that the rebates would have been inflationary, they conceded that inflation fears were genuine in the business community. Appeasing those fears seemed reasonable.
Ultimately, however, the Carter tax rebates of 1977 were a casualty of politics. Their failure was a small story — indeed, they were only a small part of the tax legislation considered that year.
But the failure was illustrative: Carter’s inability to sell the rebates to Congress was a bad omen for his ability to sell any sort of tax policy to lawmakers. Over the remainder of his single term in office, Carter would meet with a few successes in tax policy formulation. But he would face even more failures. And he would never manage to deliver on his original promises to end “the disgrace.”