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chasing power. They would have added more but for the substantial expenditure cutbacks put into effect during the year.

On the other side, taxes restrained demand. Higher payroll taxes, the restoration of some excise taxes, the institution of graduated withholding, and the suspension of tax incentives to investment all represented new measures that were draining off more than $9 billion of spendable incomes by year-end. In combination, and for the full year, these measures and an expanding economy produced $18 billion more in revenues than in 1965. Prompt action by Congress in response to my tax proposals of January and September made tax policy an important force for economic restraint.

Taking the two sides together, our national income accounts budget was in surplus in the first half and in balance for 1966 as a whole.

But as private investment threatened to outrun private saving, sharp monetary restraint was also applied. In response to both fiscal and monetary restraints, the economy shifted gears from excessive speed to a moderate advance.

FISCAL POLICY FOR 1967

In the year ahead we are determined to maintain that moderate advance; we need no further slowdown; we can tolerate no new spurt of demand. After midyear, the tax increase I have proposed and a more moderate growth of Federal spending will increase the freedom of monetary policy to support expansion. I am confident that the

opportunity will be used. The specific fiscal program I am recommending includes

-a surcharge of 6 percent on the tax liabilities of individuals,

exempting persons in the lowest income brackets; —the same 6 percent surcharge on the tax liabilities of corporations. Here are some examples of the effect of this proposal, as applied to a married couple with two dependents, using typical deductions:

With $5,000 income, their tax will be unchanged-still $130
lower than they would have paid in 1963.
With $10,000 income, their tax in 1968 will rise $67, or $1.30
a week. Their annual tax will still be $190 less than they would
have paid in 1963.
With $20,000 income, their tax in 1968 will rise $190, or $3.65
a week. But their annual tax will still be $450 less than they

would have paid in 1963. A corporation with profits before tax of $100,000 will pay an extra $2,490. It will still pay $2,510 less than it would have paid in 1963.

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One with profits of $1,000,000 will pay an extra $28,410, still $12,590 less than it would have paid in 1963.

The surcharge will provide for $5.1 billion of extra revenues in fiscal year 1968 on a national income accounts basis, substantially offsetting the expansion of $5.8 billion in defense purchases.

The national income accounts budget will also be affected by my proposals for Social Security benefits and taxes.

After allowance for these changes, the national income accounts deficit for fiscal year 1968 is now estimated at $2.1 billion, compared with $3.8 billion in fiscal year 1967.

I am also recommending two further accelerations of corporate tax payments, to begin in 1968:

-requiring quarterly payment of estimated tax on the basis of 80

percent rather than 70 percent of liability;
-requiring, over a 5-year period, that small corporations, as well
as large, become current in their tax payments, in the same way

as individual proprietors. We have fashioned a fiscal program for sustainable expansion. With that program, we now see a rise of about $47 billion in our GNP in 1967—a growth dividend close to 4 percent in real terms.

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USING THE GROWTH DIVIDEND

The first priority for the use of our growth dividend must, as always, be the defense of freedom. But it will take only a small part of our $47 billion of added production. These will be the public claims on our growth dividend: • $10 billion more of our output in 1967 will go for the support of

our men in Vietnam and other urgent needs of defense.
$11/2 billion will go for the expansion of other Federal purchases,
including adjustments in Federal civilian and military pay.
State and local governments will use about $8 billion more of the
Nation's resources in 1967. In this, they will be aided by Federal

grants totaling nearly $15 billion. The remaining $271/2 billion of our GNP gain in 1967—nearly 60 percent of it—will be used in the private sector. And the flow of goods and services to consumers will expand this year by even more than that.

• In the past several years, an unusually large part of our output

growth has gone to expand the productive capacity of business and to build up inventories to support high and growing production and sales. On balance, a slightly smaller portion of our resources will be used for these purposes in 1967 than in 1966.

For the year as a whole, slightly less of our resources than last year will be used to build new homes, although a sharp recovery in residential construction from its current deep recession is

expected during the course of the year. As the flow of goods and services to consumers expands, the ability of our elderly citizens to share in these gains will be supported by a rise of more than $6 billion in Social Security and Medicare payments. In 1967, we will have no bonus dividend from using previously idle

But the dividend from growth alone is a big one. We must be sure we get it; and we must use it wisely.

resources.

RESTORING PRICE STABILITY

From the beginning of 1961 until 1965, the United States enjoyed both price stability and a strongly expanding economy. The average of wholesale prices hardly moved, and consumer prices rose only a little more than 1 percent a year. Last year, that record was blemished. Consumer prices rose 2.9 percent between 1965 and 1966, wholesale prices 3.2 percent.

When we were involved in Korea, consumer prices rose 8.0 percent between 1950 and 1951, wholesale prices 11.4 percent. And we had price controls during most of 1951.

Even when we were not at war, consumer prices rose 3.5 percent between 1956 and 1957, wholesale prices 2.9 percent.

Nevertheless, we are not satisfied with our record on prices. And we expect to improve on it this year. There are many reasons why we refuse to tolerate rapidly rising prices:

They injure those with fixed incomes, especially older people.
They can lead to speculation and economic distortions which

could undermine prosperity.
• They weaken our competitive position in world markets.

As they persist, they become harder to stop without throwing the

economy into reverse. Restoring price stability is one of our major tasks. It will not be accomplished all at once, or all in 1967. That could be done—if at all only at the cost of mass unemployment, idle machines, and intolerable economic waste. But a gradual return to stability can go hand in hand with steady economic advance. Such an improvement will require

-prudent fiscal and monetary policies;
-Government efforts to help relieve the key points of pressure on

prices;

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-the responsible conduct of those in business and labor who have

the power to make price and wage decisions. With steady, sustainable, and balanced growth, we can look forward to

—relief of pressures on capacity in such strained areas as ma

chinery and metals;
-adjustments of raw materials supplies to demand;

—the end of labor shortages in key areas. Other efforts of the Federal Government can help to relieve particular pressures on prices and wages. We will continue

—to develop manpower training programs to meet skill shortages; —to increase the efficiency of the employment services in matching

jobs and men;
-to handle Government procurement so as to minimize its pres-

sure on prices;
to dispose of surplus Government stockpiles to alleviate shortages

of raw materials;
—to manage farm programs to assure adequate supplies as well

as equitable returns. But efforts of the Government alone will not be enough. The cooperation of business and labor is essential for success.

In the past year, most businessmen who had a choice in setting prices and most trade unions that negotiated wage contracts acted responsibly. They did so because they took account of the national interest and saw that it was also their own. If business and labor were to consider only their own short-run interests -each union might seek a wage increase which exceeds the most

recent settlement by some other union;
each business might strive to achieve a new profit record by trans-
lating strong demand into higher prices, whether or not costs

have increased. But when business and labor consider the national interest—and their own longer-run interests—they realize that such actions would have only one result: a wage-price spiral which is in the interest of neither. • If unions now attempt to recoup in wages all of the past or an

ticipated advance in the cost of living—in addition to the pro

ductivity trend; • If businesses now seek to pass along rising costs when it would be

possible to absorb them or do not reduce prices when costs fall; then the result will be just such a spiral—damaging to business, damaging to labor, and disastrous to the Nation.

Once again, I appeal to business and labor-in their own interest and that of the Nation for the utmost restraint and responsibility in wage and price decisions.

INTERNATIONAL ECONOMIC POLICIES

The current year is a critical one for our international economic policies and for the economic progress of the world community.

As the largest single market and source of capital, the United States carries special responsibilities.

TRADE

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This Administration is committed to reducing barriers to international trade, as demonstrated by my recent action terminating the 1954 escape clause action on watches, and rolling back the special tariff on imports of glass.

The Kennedy Round of trade negotiations is now entering its final and most critical phase. I emphasize once more how important this great attempt to liberalize world trade is for all the developed and developing nations of the free world.

After more than 4 years of discussion, it is essential that the participants now resolve the many complex problems that still remain. It would indeed be a tragedy if the wide authority granted to the President by the Trade Expansion Act of 1962 were allowed to lapse unused. Never before has there been such a splendid opportunity to increase world trade. It must not be lost.

But the Kennedy Round is not the end of the road. We must look beyond the negotiations in Geneva to further progress in the years ahead. We must begin to shape a trade policy for the next decade that is responsive to the needs of both the less developed and the advanced countries.

We should seize every opportunity to build and enlarge bridges of peaceful exchange with the countries of Eastern Europe and the Soviet Union. We should have the ability to adapt our policies to whatever political circumstances or commercial opportunities may present themselves. I again urge the Congress to provide authority to expand our trade relations with Eastern Europe and the Soviet Union.

AID

Although 1966 was a relatively good year for world economic growth, average output in developing countries rose by less than $3 a person.

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