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What happened when JFK lowered taxes?

What happened when JFK lowered taxes?

JFK reading.jpg

By TATIANA PROPHET

Conservatives generally seize on the notion that John F. Kennedy cut taxes.

Liberals tend to scoff at this idea, stating why the situation was different.

Let’s examine the facts, looking for balance. When JFK got elected, beating Eisenhower's Vice President Richard Nixon, it was 1960, and the country was in the middle of a recession caused mainly by the Federal Reserve raising the funds rate sharply (the rate that it charges banks for overnight lending). The Fed was concerned about inflation, as GDP growth in 1959 had been 7.25 percent. 

Kennedy immediately increased government spending and encouraged the Fed to buy treasury bills and reduce the funds rate once again (tinkering that falls squarely in line with the ideas of John Maynard Keynes). But in the Revenue Act of 1962, he and Congress cut the corporate tax rate from 57 percent to 47 percent -- NOT a Keynesian tactic and more in line with "supply-side economics," now pretty much universally called "trickle-down economics" by its opponents. Regarding his proposed tax cut, he famously told the country that “a rising tide lifts all boats.” It was the conservatives who opposed this move at the time, citing the deficit. By 1962, economic growth was 6.2 percent after two years of 2.1 percent growth (by comparison, GDP growth in the last year of the Obama administration was 1.5 percent and its peak under Obama was 2.9 percent). Some of that growth is definitely due to JFK's "deficit spending," which he achieved without Congress by directing his cabinet to move forward on their budgeted spending as soon as possible. During his time in office, JFK added $23 billion to the national debt, which after Eisenhower stood at $289 billion.

Along with growth, tax revenue is a major indicator of the success or failure of a tax cut. The Joint Committee on Internal Revenue Taxation (now the Joint Committee on Taxation) estimated that the Kennedy plan would result in a tax shortfall of $7.6 billion in 1964, and $11.4 billion in 1965. What actually happened was that total revenue rose by $6 billion in 1964 and by $5 billion in 1965.

After the assassination, in 1964, Congress passed another tax cut crafted by JFK, this time on personal income tax.

To compare the Kennedy tax cuts with the cuts orchestrated by President Trump and the Republicans, personal income tax came down in 1964 from 91 percent to 65 percent at the top, and from 20 percent to 14 percent at the bottom. Taxes were still very high from World War II. By contrast, the 2017 tax bill is trimming the top marginal rate from 39.6 percent to 37 percent. While the JFK corporate tax cut existed at a much higher level, the spread was 10 points (not a small cut), whereas the Trump spread is 14 points, with the corporate tax rate going from 35 percent to 21 percent.

The biggest difference in the corporate tax cuts in 1964, and now in 2017, is arguably what portion of all tax revenue comes from corporate taxes. In 1962, federal corporate tax receipts were $20.5 billion out of $99.7 billion. That was 20.5 percent. In 2015, total federal corporate tax receipts were $343.8 billion out of $3.25 trillion. That makes corporate taxes 10.6 percent of all federal tax revenue for that year. In other words, because the corporate tax rate has been steadily falling for decades, it would naturally make up a smaller portion of tax revenue.

So how was economic growth in 1963 and 1964? It was stellar by today's standards. In 1963, the economy grew by 4.1 percent, and in 1964, it grew by 5.8 percent. It was above 6 percent for the next two years, followed by a slight slacking off in 1967, at 2.7 percent. To be sure, not all of that was due to tax cuts.

But some of it was. Look at business-friendly Ireland, with its corporate rate of 12.5 percent, whose GDP grew by 26.8 percent in 2015. The United States had 2.5 percent GDP growth in the same year. But as the link mentions, it's easy to attract companies when you're the only one slashing taxes.

Here is a thorough and nuanced take on the Kennedy tax cuts.

And here is the counterargument that Kennedy’s actions were not in any way similar to tax cuts by Ronald Reagan or Donald Trump, by none other than Robert Schlesinger, managing editor for opinion at US News and World Report and the son of Kennedy adviser and historian Arthur M Schlesinger Jr.

Here again, is the counter to the counterargument, by James Pethokoukis, a blogger for the notoriously right-leaning American Enterprise Institute and former Washington columnist for Reuters Breakingviews.

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