By BRUCE BARTLETT
Fifty years ago this week, on Jan. 24, 1963, John F. Kennedy sent a special message to Congress on tax reduction and tax reform. Enacted the following year by Lyndon B. Johnson, the legislation cut the top federal income tax rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent. Ironically, it later became the template for Republican tax policy.
Those who don’t know the history probably assume that the tax cut was a slam-dunk for Kennedy, something that was overwhelmingly popular. In fact, a big tax cut was highly controversial because at that time Republicans actually cared about the deficit and recognized that tax cuts would increase it. This view was shared by the large bloc of conservative Southern Democrats then in Congress and the general public as well.
For example, on Dec. 14, 1960, before Kennedy was inaugurated, Senator Harry F. Byrd Sr., Democrat of Virginia and chairman of the powerful Senate Finance Committee, warned Kennedy against even thinking about a big tax cut, given the deficit situation. According to an Associated Press report published in The New York Times, Senator Byrd told Kennedy that a tax cut “would be the worst thing we could do.”
A July 1962 Gallup poll asked the American people, “Would you favor or oppose a cut in federal income taxes at this time, if a cut meant that the government would go further in debt?” Only 19 percent of people supported a tax cut, even though the high World War II-era tax rates were still in place; 72 percent were opposed.
Even among those who said that their taxes were too high, only 31 percent supported a tax cut if it would add to the deficit; 61 percent were opposed.
However, in mid-1962, Kennedy was concerned that the economy was not growing enough and that this would endanger his re-election in 1964 unless some action were taken. His economic advisers, under the influence of the British economist John Maynard Keynes, advocated an intentional increase in the deficit to stimulate aggregate demand.
But they were divided about the best way to do it. John Kenneth Galbraith, who had tutored Kennedy in economics at Harvard and was serving as ambassador to India, argued in favor of an increase in public spending to deal with unmet social needs. Kennedy rejected this advice because it would never pass Congress and because he was worried about inflation and growing pressure on the dollar from abroad.
Kennedy’s other economists favored a temporary tax cut to put money into peoples’ pockets. This course had been recommended in a 1961 report from Paul A. Samuelson of the Massachusetts Institute of Technology. Kennedy endorsed the idea at a June 7, 1962, news conference, but he remained concerned about both the politics and economics of this approach.
On Aug. 6, 1962, Kennedy met with Representative Wilbur Mills, chairman of the House Ways and Means Committee, and Mr. Mills suggested that the president consider a permanent tax rate reduction rather than a temporary one, which would be viewed as an election ploy. This would satisfy the desire of Keynesian economists to stimulate demand, and in a way that would be hard for conservatives to oppose.
On Aug. 10, 1962, Kennedy met with his economic advisers and they endorsed this approach. We know what transpired at these meetings because Kennedy secretly taped them. They were published in 2001.
Kennedy’s Jan. 24 message got the ball rolling. Using rhetoric that could easily have been spoken by Ronald Reagan two decades later, Kennedy said:
As I have repeatedly emphasized, our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficits temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget.Kennedy even made a “Laffer curve” case that the economic stimulus would be so great that it would offset much of the estimated revenue loss:
Once this tax brake is released, the base of taxable income, wages, and profits will grow – and a temporary increase in the deficit will turn into a permanent increase in federal revenues. The purpose of cutting taxes, I repeat, is not to create a deficit but to increase investment, employment and the prospects for a balanced budget.Largely forgotten to history is that Kennedy also favored tax reforms to offset some of the estimated revenue loss. The most important of these would have been to tax all unrealized capital gains at death. Then, as now, unrealized capital gains held until death are never taxed; heirs treat the property as if it were purchased for a price equal to its value at the time of death, no matter how large the amount or how wealthy the decedent. This is an unjustified loophole that tax reformers still object to.
Kennedy’s tax plan was exactly what Republicans today recommend, but they opposed it strenuously at the time. The Republican members of the Ways and Means Committee unanimously opposed it, saying, “It is morally and fiscally wrong, and will do irreparable damage to the Republic.”
When the tax cut came up for a final vote in the House of Representatives on Sept. 25, 1963, only 48 Republicans supported it; 126 voted against it. Nevertheless, it passed by a vote of 271 to 155.
The prospects for the tax cut in the Senate were always far more dicey. A conservative coalition of Republicans and Southern Democrats had essentially controlled that body since the late 1930s, and they put budget balance ahead of tax reduction.
It is probably only because of Kennedy’s assassination in November 1963 and the strenuous efforts of Johnson, who had led the conservative coalition in the 1950s as Senate majority leader, that the tax cut passed the Senate. Even so, 11 Democrats and 10 Republicans voted against its final passage on Feb. 7, 1964.
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