Sunday, January 31, 2010

JFK's tax cut

As I said earlier, conservatives have recently been invoking President John F Kennedy's tax cuts. JFK did indeed propose to cut taxes, but that's not the whole story - this Slate article by David Greenberg argues that JFK aimed the tax cuts across the board:

When Kennedy ran for president in 1960 amid a sluggish economy, he vowed to "get the country moving again." After his election, his advisers, led by chief economist Walter Heller, urged a classically Keynesian solution: running a deficit to stimulate growth. (The $10 billion deficit Heller recommended, bold at the time, seems laughably small by today's standards.) In Keynesian theory, a tax cut aimed at consumers would have a "multiplier" effect, since each dollar that a taxpayer spent would go to another taxpayer, who would in effect spend it again—meaning the deficit would be short-lived.
At first Kennedy balked at Heller's Keynesianism. He even proposed a balanced budget in his first State of the Union address. But Heller and his team won over the president. By mid-1962 Kennedy had seen the Keynesian light, and in January 1963 he declared that "the enactment this year of tax reduction and tax reform overshadows all other domestic issues in this Congress."

The plan Kennedy's team drafted had many elements, including the closing of loopholes (the "tax reform" Kennedy spoke of). Ultimately, in the form that Lyndon Johnson signed into law, it reduced tax withholding rates, initiated a new standard deduction, and boosted the top deduction for child care expenses, among other provisions. It did lower the top tax bracket significantly, although from a vastly higher starting point than anything we've seen in recent years: 91 percent on marginal income greater than $400,000. And he cut it only to 70 percent, hardly the mark of a future Club for Growth member.

Yet the Kennedy-Johnson team saw the supply-side effects of the bill as secondary, if not incidental, to its main goal of prodding near-term growth. "The tax cut is good for long-run growth," said James Tobin, another economist on JFK's team, "only in the general sense that prosperity is good for investment." The immediate boost to the economy was the main goal. In fact, Nixon's economic adviser Herb Stein noted that the 1964 plan led to a diminished output-per-person-employed—a fact that could argue against the supply-side tenet that lower marginal rates would unleash the productivity of workers deterred from working harder because of overtaxation.

If the JFK cuts increased the amount of the standard deduction, which is a flat amount that every taxpayer deducts from their gross income, this would have had a larger benefit to the low- and moderate-income people. The same is true for withholding rates - these are the amounts that are held back from each paycheck so that the Treasury gets a constant stream of money instead of one large payment on April 15.

Note also that while the top 12% of earners got 45% of the tax cuts, the taxes were cut from a confiscatory level. Bush's tax cuts benefitted the rich far more than that, and the rich were already taxed at a much lower rate. Conservatives should be very careful when invoking JFK.

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