Heller Recommends Income Tax Hike

Walter W. Heller last night recommended that President Johnson move swiftly to shape a program of temporary tax increases."

The principal architect of the expansionary and prosperity producing economic policies of the past five years expressed a hope that America, which "accepted the idea of tax cut to close a deflationary gap," would understand tax increases to cool off an overheating economy, to close an "inflationary gap growing out of Vietnam."

In his second Godkin Lecture, the former chairman of the President's council of Economic Advisers stated that there were many indications that restrictive fiscal policy, through a temporary income tax increase, is necessary:

*A possible reduction of unemployment to 3 per cent of the nation's working force will cause "upward pressure on wage rates" as well as "rising effective wages," as hiring standards lowered and present workers upgraded as a result.

*"Price increases, until recently largely confined to a new areas, are now appearing on a wider front."

*Purchasing agents report that "an inflationary psychology may be developing."

Future confidence in the success of an expansionary economic policy actively pursued by federal tax cuts and deficit spending will depend on Johnson's ability to cope with the threat of inflation caused by the rising U.S. commitment to the war in Vietnam, Heller said.

However, he perceived a potential conflict in the goals of American policy. As of now, we face a choice between "possible inflation and distortion on one hand, and more employment on the other," he said.

If unemployment were allowed to fall to 3 per cent, the barriers of employment for the "unskilled, the nonwhite, the very young and the very old in our work force" would be broken to a great degree, Heller said.

But unchecked expansion in view of rising expenditures for Vietnam would risk not only the "inequity" of rising prices insuring an inflation, but also "the deterioration of our {international} balance of payments position," he noted.

More important, our pursuit of full employment and a high rate of economic growth may be jeopardized when "corrective rather than preventive steps must be finally taken," Heller cautioned.

The Federal Reserve Board's decision in December to raise the discount rate from 4 to 4 1/2 per cent, causing the cost of credit to rise moderately, Heller explained, as well as Congressional enactment of excise tax increases, have moderated the boom in the American economy to a certain extent.

However, Heller contended that he has seen signs in the past three weeks that have prompted him to call for a temporary tax increase now instead of on a conditional basis in the future:

* a 16 per cent increase in plant and equipment investment has been forecast for this year and such predictions are traditionally low.

* The forecast of a 3.75 per cent unemployment rate looks too high; until this year the federal government defined a full employment economy as having a 4 per cent rate