To the Congress of the United States:
I am proposing to you today a two, year $31.2 billion economic recovery package, whose budgetary costs will be divided almost equally between fiscal years 1977 and 1978 (Table 1). The main components of the program are:
--an increase of $4 billion in authorizations for local public works;
--an expansion of public service employment by 415,000 jobs;
--an expansion of training and youth programs under the Comprehensive Employment and Training Act (CETA) by 346,000 positions;
--an increase in the countercyclical revenue sharing program designed to pay out an additional $1 billion a year at current rates of unemployment;
--a $4 billion program of tax reform and simplification for individuals, through an increase in the standard deduction;
--individual tax rebates, and payments to Social Security, Supplemental Security Income (SSI) and Railroad Retirement beneficiaries,' which will total $11.4 billion;
--an optional credit against income taxes equal to 4 percent of payroll taxes or an additional 2 percent investment tax credit for businesses.
While a healthy housing industry is also critical to economic recovery, this area requires long-term commitments, rather than a short-range program. The Secretary of Housing and Urban Development is now developing a long-term housing program for low and middle income families, which will contribute to sustained economic growth.
The economy I found when I took office had 7.5 million Americans out of work, 1.4 million full-time workers forced
TABLE 1 .--Budgetary Cost of the Economic Recovery Program Above Current Levels
FY 1977 FY 1977 FY 1978 FY 1978
Budget Budget Budget Budget
Authority Outlays Authority Outlays
(Appropria- or reductions (Appropria- or reductions
tions) in receipts tions) in receipts
Increased Countercyclical Revenue
Sharing 0.5 0.5 0.6 0. 6
Public Service Employment 0.9 0.7 3.4 3.4
Skill Training and Youth Programs in
CETA 1.5 0.3 1.3 1.6
Public Works ($4 billion authorization) 2.0 0.2 2.0 2.0
Tax Reform and Simplification for In-
dividuals (increase in standard de-
duction) 1.5* 5.5*
Business Tax Reduction 0.9 2.7
Tax Rebate and Payment to Social
Security, S.S.I., and Railroad Retire-
ment Beneficiaries 1.8 11.4
TOTAL STIMULUS PACK-
AGE (Reduced Receipts Plus
Increased Outlays) 6.7 15.5 7.3 15.7**
* While the tax reduction will apply to the full year 1977 tax liability, withholding rates will only be reduced for part of 1977, since passage of the law will come after the year is partly over. As a consequence, taxpayers, in 1978, will receive some additional refunds.
** Details do not add to total due to rounding.
to take part-time jobs, and still another 1 million workers who had dropped out of the labor force because jobs are so hard to find. The outgoing Council of Economic Advisers conservatively estimated that our economy operated in 1976 at approximately $132 billion below its high employment potential; every household in our country lost approximately $1,800 per year as a result. The nation lost approximately $35 billion in federal tax revenues and approximately $10 billion in state and local revenues because of inadequate economic performance. Last year, expenses caused by the recession--such as unemployment compensation--were $22 billion higher than in 1973, the last pre-recession year. Economic growth has declined for three consecutive quarters. Most economists have projected that, without further stimulus, the economy would grow by an inadequate 4.5-5% in 1977. The severe weather this winter will probably reduce growth even further, if no action is taken.
A vigorous U.S. economy is vital to our domestic welfare as well as to world stability and order.
In preparing this detailed economic package I have been guided by several principles:
A. Continuity and Consistency. Because we sought a sustained expansion in consumer spending and business investment, we have developed a two-year program, which will provide stimulus in both this and the next fiscal year, and will also retain enough flexibility so that we can adjust the program up or down should circumstances require. This two-year program will provide the private sector with a genuine opportunity to plan ahead.
B. Speed. Because of the need for an immediate stimulus to consumer purchasing power, we have included an $11.4 billion tax rebate and cash payment section in our package which, if promptly enacted by Congress, would permit us to mail checks to taxpayers this spring. It is simply impossible for public works and public service employment programs to get money into the economic stream that quickly.
C. Fairness. Because we wanted to target the benefits of this program to those most in need, the bulk of the reduction in personal income taxes will go to low and middle income taxpayers (Tables 2 and 3). The business tax reductions have been specifically designed to reduce costs and provide incentives not only for large businesses but for small ones as well. The spending and job creation programs will be targeted to the hard core unemployed and to those communities hurt most by the recent recession.
D. Effectiveness. Our program only promises what can realistically be done. We are proposing major expansions of existing programs within a short period of time. To force more money, faster, into the system would risk poor administration.
E. Limitation on Permanent Budget Cost. Because we are committed to a balanced Federal budge for fiscal year 1981, we want to hold down the size of permanent spending increases or tax reduction. The tax rebate and many of the spending programs are temporary, and will end as
TABLE 2.--Estimated Effects of the Administration's Tax Rebate Program, Distributed by Adjusted Gross Income Class
(Calendar Year 1976 Levels of Income)
Tax change resulting from the fifty dollar per capita rebate
INCOME CLASS Amount Percentage Cumulative
($000) ($ millions) distribution percentage
Less than 5 --984 10.3 10.3
5-10 --2,010 21.0 31.2
10-15 --2,223 23.2 54.4
1 5-20 --1,904 19.9 74.3
20-30 --1,695 17.7 92.0
30-50 --564 5.9 97.9
50-100 --169 1.8 99.6
100 or more --36 0.4 100.0
TOTAL --9,585 100.0
Note: Details may not add to totals due to rounding.
*Less than $500 thousand or 0.05 percent.
1Includes the effect of extending the $35 general tax credit to exemptions for age and blindness.
Office of the Secretary of the Treasury
Office of Tax Analysis
January 26, 1977
the economy recovers. The business tax reductions and the increase in the standard deduction are permanent, but we recommend them as ways to simplify the tax code and stimulate business investment.
This program, if it is passed, should increase the nation's output at a rate of $14 to $18 billion per year by the end of 1977 and $25 to $35 billion per year by the end of 1978. Together with the previously anticipated growth of the economy, the program should reduce unemployment by almost one million by the end of this year, with further significant reductions in 1978.
The gross budget costs of the program are estimated to be $15.5 billion in fiscal year 1977 and $15.7 billion in fiscal year 1978. But the increased incomes and jobs which a growing economy will produce will increase Federal revenues and decrease expenditures on unemployment insurance and welfare. As a result, we anticipate offsetting reductions in net Federal costs of about $3 billion and $8 billion in fiscal year 1977 and fiscal year 1978, respectively.
The economic program I have proposed will set the stage for substantial growth in the years ahead. It will restore consumer confidence and consumer purchasing power; it will encourage businessmen to invest in a long-term growing economy; it will pave the way for a balanced Federal budget by fiscal year 1981.
The program will not aggravate current levels of inflation in any significant way. With 7.5 million people looking for work and 20 percent of our industrial capacity idle, we can now afford to spur recovery without risking significant new inflation.
This Administration will never let its guard down against inflation, which robs us all. My proposed credit against payroll taxes will tend to reduce labor costs and will, therefore, also help hold prices down.
I will soon announce a substantial strengthening of the Council on Wage and Price Stability. The Council will analyze the supply and demand trends in particular industries, so that we can spot bottlenecks and potential shortages and try to prevent them. It will also perform a more active job of monitoring wage and price developments. I believe that both business and labor will be willing to cooperate by giving us voluntary prior notice of important wage and price increases.
I have asked all my Cabinet officers to evaluate continuously the inflationary impact of their Departments' programs and regulations. I have already instructed the Secretary of Health, Education, and Welfare to develop a program for reducing the rapid rise in hospital costs.
Most importantly, this Administration intends to work closely and cooperatively with both labor and business to minimize inflation and help ensure a solid increase in jobs, real wages, and real profits. Meetings among my economic advisers and labor and business leaders will begin within the next few months.
With these principles in mind, I urge the adoption of the following programs:
A. Expenditure Programs
1. Public Works. I recommend an immediate $4 billion authorization for additional emergency public works beyond the $2 billion authorized by the Congress last year, with $2 billion to be appropriated for fiscal year 1977 and $2 billion for fiscal year 1978.
As the public works program has been implemented, the current formula for allocating funds has left some hard-pressed communities with inadequate funding, while their more .affluent neighbors have had substantial programs approved. The Secretary of Commerce is now undertaking a careful review to determine whether the current 70%-30% allocation formula between high and low unemployment areas should be changed. After she completes her study, we will recommend legislation. In the interim, I have asked the Secretary to do everything possible under existing law to direct greater amounts of money into areas of high unemployment.
2. Employment and Training Programs. The economic stimulus package is designed to cope with both cyclical unemployment, which is caused by the economic recession, and structural unemployment, which affects those who lack the necessary training and skills to find work even in good times. The first group can largely be helped by general economic stimulus. The second group requires special training and placement programs.
I propose the following programs to help these groups:
a. Public Service Employment. It is time to take our people off welfare and put them to work, with maximum emphasis on creating jobs in the private sector. But it will take time for an expanding private economy to provide a large number of jobs for the unemployed. In the meantime we must expand temporary public service jobs for those who would find it difficult to obtain work in private industry.
I propose an increase in the number of federally-funded public service jobs under the Comprehensive Employment and Training Act (CETA) from 310,000 now to 600,000 by the end of fiscal year 1977 and to 725,000 for fiscal year 1978. This program would cost $0.7 billion in fiscal year 1977 and $3.4 billion in fiscal year 1978 (Table 4).
This public service program will enable the unemployed to use their talents to serve their fellow citizens in hospitals, in mental institutions, in improving our national parks, in recreation programs, in rehabilitating those parts of our cities where crime is high and hope is scarce, and in energy-saving activities. We will target our public service employment programs to areas of national need--such as the improvement of our national parks, and the insulation of homes and public buildings as well as other energy-saving activities.
b. Youth Training and Employment Programs. Unemployment among our young people is far higher than the national average for workers of all ages, so we must target specific programs to our unemployed youth. I am proposing to expand the youth-oriented programs in CETA, Titles III and V, by 176,000 slots from 422,000 to 598,000 (Table 4).
The basic youth programs will be conducted by the State and local governments which are prime sponsors under CETA. An additional program will be established to take rural and urban young people aged 16 to 21 off of the streets and put them to useful work helping to conserve, develop and maintain our natural resources and recreation areas. This, like the Civilian Conservation Corps of 40 years ago, would be a way to let young people serve their Nation while expanding their own horizons.
c. Vietnam-era Veterans. Military veterans of the Vietnam-era deserve special
TABLE 4.--Increases in Public Service Jobs Above Current Levels
(Slots in thousands)
FY 1977 FY 1978
additions to additions above
current levels current levels
Public Service Employment, CETA Title VI
Slots, end of period 240 340
Public Service Employment, CETA Title II
Slots, end of period 50 75
Youth, CETA Title III
Slots, end of period 72 154
Skill Training Improvement Program, CETA Title III
Slots, end of period 58 58
Help Through Industrial Retraining and Employment
(HIRE), CETA Title III
Slots, end of period 60 92
Migrants, Indians, Veterans CETA Title III
Slots, end of period 10 20
Job Corps, CETA Title IV
Slots, end of period 8 22
Apprenticeship Expansion, CETA Title III
Slots, end of period N/A N/A
Slots 498 761
attention, both because our Nation owes them a debt of gratitude for their service and because their employment problems are so severe.
For Vietnam-era veterans between the ages of 20 and 24, the unemployment rate is 18%, compared to 12.5% for non-veterans of the same age, with disabled and black veterans hit even harder. More than 20% of young black Vietnam-era veterans are now unemployed.
I am therefore proposing the creation of 92,000 jobs under Title III of CETA by the end of fiscal year 1978 in a new program called Help Through Industrial Retraining and Employment (HIRE), which will emphasize employment opportunities for Vietnam-era veterans (Table 4).
Under the HIRE program, which could be expanded to include non-veterans, the largest corporations, through Federally-funded initiatives, will be encouraged to make private sector job opportunities and training available to Vietnam-era veterans.
HIRE will initially focus on disabled Vietnam-era veterans and then reach out to include all Vietnam-era veterans. If there are not enough Vietnam-era veterans available in a community to fill job openings, those jobs will be made available to disadvantaged young job seekers and then to the long-term unemployed.
The government will pay a firm a variable amount per Vietnam-era veteran hired--depending on that persons' occupational level and job--for each day of employment and training provided to such a person, up to a maximum of twelve months.
In order to insure that this program creates new jobs, we will require, as a condition of Federal assistance, that the employment of target group members not result in the displacement of any worker who is currently employed by the firm, who has been laid off, or who is on strike.
I propose to increase the proportion of Public Service Employment jobs held by Vietnam-era veterans. Local goals will be developed by individual prime sponsors and keyed to the number of veterans available in the area served.
I have also asked the Department of Labor to establish outreach units, staffed by disabled Vietnam-era veterans, in State Employment Service local offices. They will identify other disabled Vietnam-era veterans and guide them to special programs, services, and available job opportunities. Even before this program is enacted, we will urge the CETA prime sponsor to increase voluntarily the number of Vietnam-era veterans in the expanded Public Service Employment program.
d. Other Employment and Skill Training Programs. We must improve employment opportunities and skill training for all disadvantaged groups, through innovative approaches to training and private sector employment.
Therefore I am proposing an increase of 58,000 slots in the Skill Training Improvement Program and a doubling of outlays for apprenticeship programs under Title III of CETA (Table 3). In order to better match our training programs to industry needs, I will instruct the Department of Labor to establish a skill training improvement program authorized under Title III of CETA, to be administered by CETA prime sponsors with full involvement of the private sector.
Under the expanded apprenticeship program which I have requested, apprentices will be allowed to continue developing their skills even during periods of unemployment. A similar program will be extended to workers at the journeyman level.
Migrants and Indians require special attention because of their high levels of unemployment. I am therefore proposing an addition of 20,000 slots, largely for migrants and Indians, under Title III of CETA.
I will instruct the Department of Labor to solicit innovative proposals from governmental units, private nonprofit organizations, and tribal organizations. The new initiatives will include residential training for migrant and seasonal farm workers, training programs coordinated with rural economic development activities, rehabilitation of farm labor housing camps, and publicly assisted home rehabilitation and weatherization projects.
The Indian initiative will support efforts to improve the internal strength 'of Indian communities. The efforts will include employment and training activities in connection with road building, the development and management of industrial parks, construction of waste disposal systems, domestic fuel development, irrigation projects, and housing development and management.
3. Countercyclical Revenue Sharing. Under 'the countercyclical revenue sharing program passed by Congress in 1975, additional funds are made available to states and localities when the national unemployment rate exceeds 6% a year. I propose to fund the existing program fully through fiscal year 1978 and to expand it further.
Under current law, $125 million is made available in each quarter to state and local governments when national unemployment rises above 6%. For each 1/2 of 1% of unemployment above 6%, an additional $62.5 million is released in each quarter. Localities then qualify for their portions on a formula based upon their excess unemployment and general revenue sharing allocation.
Under my proposal each 1/10 of 1% of unemployment above 6% would allow $30 million of new funding to be distributed each quarter in addition to the basic $125 million available at 6% unemployment. At 7.5% unemployment, this plan would distribute $2.25 billion annually, compared to $1.25 billion under the current program. By changing the formula we would make the program more sensitive to the unemployment rate.
I therefore now recommend that the new countercyclical revenue sharing be authorized on a five-year basis instead of the current one year, so that it will automatically continue in effect and be ready if needed in the future.
The proposed expansion of this program will add an estimated $500 million in fiscal year 1977 and $600 million in fiscal year 1978 over and above the current program level.
B. Tax Reductions
1. Rebates and Cash Payments. The rebate and cash payment program which I propose has three components:
a. A $50 non-refundable rebate of 1976 taxes for each taxpayer and his or her dependents up to the limit of the taxpayer's liability. It will cost $8.2 billion.
b. For families who were eligible and file for the earned income credit, a refundable rebate would be paid to bring the total rebate up to $50 per person, even if that exceeds the family's 1976 tax liability. This will be of particular benefit to the working poor. It will cost $1.4 billion.
c. A $50 payment in 1977 to every beneficiary of Social Security, Supplemental Security Income (SSI), or Railroad Retirement. These payments would be of particular benefit to the aged poor. This will cost $1.8 billion.
These rebates are intended to provide prompt spending power to almost every American. The Internal Revenue Service can begin sending checks five weeks after these proposals are enacted by the Congress. The rebates and payments would have a budgetary cost of $11.4 billion in 1977, and no impact in 1978.
This rebate will inject money into the economic stream quickly. 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.
2. Tax Reduction and Simplification. I recommend a permanent increase in the standard deduction, which now ranges from $2,100 to $2,800 for couples and from $1,700 to $2,400 for single persons, to a flat $2,800 for couples and $2,400 for single persons. Thus the existing complex standard deduction would be replaced by a larger, flat standard deduction.
This change would mean that 3.7 million low-income taxpayers and their families would no longer have to pay taxes. An additional 4 million taxpayers would find it more advantageous to use the less burdensome standard deduction rather than to itemize deductions each year. This would be an important first step in simplifying our tax returns, which are particularly complicated this year.
If this proposal is adopted, roughly 75% of American taxpayers will be able to take the standard deduction and make a simple computation of their tax liability. As Table 3 indicates, all the benefits of this reform will go to low and middle income taxpayers.
This proposal would cost about $4 billion per year. The decline in receipts would be $1.5 billion in fiscal year 1977 and $5.5 billion in fiscal year 1978, of which roughly $1.5 billion would be refunds on 1977 tax liability.
3. Tax Relief for Business Firms. I recommend that businesses be allowed to take either a credit against income taxes equal to 4 percent of Social Security payroll taxes paid by the employer, or an additional 2 percent credit for new investment in machinery or equipment. Each firm could choose which credit to take, but its choice would be binding for a fixed number of years.
I hope that the program I have set forth today will receive careful, prompt, and full consideration by the Congress of the United States. Our people are ready to see the Executive and Legislative branches move from an era of confrontation to an era of cooperation. Our common commitment is to put America--its people, its plants, its inventive genius--to work again.
The White House,
January 31, 1977.