Remembering the Real Economic Legacy of JFK

Last week Sen. Ted Kennedy (D.-Mass.) wrote me a letter blasting the Club for Growth for running TV ads using President Kennedy’s name and image in support of the case for cutting taxes. The letter calls our ads comparing the Bush and Kennedy tax cuts “politically irresponsible and grossly inaccurate.”

In fact, what the letter really shows is that Ted Kennedy does not understand the economic policies of his brother, the slain President. The senator is not alone. Democrats today are completely uninformed about the tax-cutting legacy of John F. Kennedy.

Let’s set the record straight on the similarities between the Kennedy and Bush tax cut programs. In 1962, President Kennedy sponsored legislation to cut income tax rates by 20%. He also proposed a 10% reduction in corporate income taxes to spur economic growth and job creation. (Even then-freshman Sen. Ted Kennedy voted for that tax cut.) The cuts were an unparalleled economic success. Total national employment grew by more than one million jobs in the next four years. The economic growth rate climbed from 4.3% to 6.6%.

The cuts also generated increased revenues, which helped balance the budget. Total income tax receipts grew from $48.7 billion in 1964 to $68.7 billion by 1968. This was a faster rate of revenue growth than had been achieved in the five years before the tax cuts. This was just as President Kennedy had predicted. In his 1963 speech to the Economics Club of New York, he declared:

“It is a paradoxical truth that tax rates are too high today and tax revenues are too low. . . . An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.”

Fatuous Democratic Claims

These basic facts about the supply-side success of President Kennedy’s tax cuts are incontrovertible. With lower tax rates, Americans increased their work effort, businesses increased their investment spending, and the economy accelerated into a higher gear, just as President Kennedy and his advisers predicted they would.

Ironically, back then it was Republicans who complained that the tax cuts were “fiscally irresponsible” and would increase the deficit to intolerable levels. President Kennedy skewered his opponents on this point when he said: “Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other. . . .It is between two kinds of deficits-a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy-or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, produce revenues, and achieve a future budget surplus. The first type of deficit is a sign of waste and weakness-the second reflects an investment in the future.”

Today, Democrats make the same fatuous claims against President Bush’s tax cut as the Republicans made then.

Sen. Kennedy complains that President Bush’s tax plan is not at all similar to President Kennedy’s plan because the Kennedy tax cut was “responsible” and the Bush tax cut is not. But this cannot be true because the Kennedy tax cut was much larger than the cut Bush is now proposing. The current Bush proposal is about one-third as large as the Kennedy tax cut as a share of national income and as a share of the budget. How could that much larger tax cut be responsible, but this one not be?

Today’s Democrats claim the Bush tax cut is “irresponsible” because of the large national debt today. Yet, in 1963 the national debt was higher than today, and that did not deter JFK from cutting taxes. In 1963, the federal debt was 42% of GDP; today it is 36% of GDP.

Sen. Kennedy next alleges that JFK’s tax cut was for the middle class and Bush’s tax cut is for the rich. I have read through all of President Kennedy’s speeches and writings on the tax cut-which are richly informative in making the case for lower tax rates as an engine for higher growth-and he never once resorted to the kind of “rich-bashing” class-warfare rhetoric that has become so distressingly commonplace in the current political dialog. When selling his plan, President Kennedy always talked in terms of giving better incentives to workers to increase their effort and businesses to increase their output.

Was President Kennedy’s tax cut really less oriented toward the rich than President Bush’s? The facts suggest otherwise. The Kennedy tax cut reduced the top income tax rate from 91% to 70%. That was a 21-point cut in the tax rates on the rich. The Bush plan, by contrast, cuts the top income tax rate from 39% to 35%, which is a 4-point reduction. The Kennedy plan gave a larger tax break to the rich than either the Reagan or the Bush tax cuts.

Of course, by cutting income tax rates, the Kennedy plan increased work effort and investment which led to an increase in the tax payments by the rich even at the lower rates. That also happened as a consequence of the Reagan tax cuts in 1981.

I concede that the Bush plan will not have nearly the positive economic effects that the Kennedy plan did. But that is not because Bush wants to cut tax rates on the wealthy by too much, but rather by too little. Senate Republicans have unwisely voted to cut the Bush tax cut in half and even that smaller proposal has been opposed by Sen. Kennedy and most other Senate Democrats.

In his letter, Sen. Kennedy objects to the dividend tax cut, which he says, “President Kennedy did not support.” The truth is the Kennedy income-tax-rate cuts substantially reduced the dividend tax at every income level. For the richest Americans, the dividend tax was cut from 91% to 70%. The historical record is very clear that President Kennedy saw a great economic gain from reducing the tax on stock ownership. Although it was not ultimately included, President Kennedy viewed a reduction in the capital gains tax as a central part of his tax plan. In fact, here is a direct quote from President Kennedy on the importance of cutting taxes on stock investments: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” That statement sounds awfully similar in tone to what President Reagan said in the 1980s about his tax plan and what George W. Bush is now saying about his dividend cut. They are all correct.

Sen. Kennedy ends his letter by noting that President Kennedy’s tax plan paved the way for jobs and prosperity, but that the first Bush tax cut in 2001 has not had a positive economic effect. The key difference, however, is that the full Kennedy tax cut was correctly enacted immediately, and President Kennedy’s economic advisers argued strenuously against phasing in the tax rate reductions. But with the first Bush tax cut the modest income-tax-rate cuts are phased in over a 6- to 8-year period-a phase-in done at the insistence of Democrats in Congress.

All President Bush wants to do now is make all the tax-rate cuts effective immediately just as the Kennedy cuts were immediate. How can any genuine JFK Democrat oppose the logic of that policy at a time of economic distress?

President Kennedy famously declared in 1962 that the best means to grow the economy “is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system-and this administration [has] pledged itself . . . to an across-the-board, top to bottom cut in personal and corporate income taxes. . .”

That is precisely what President Bush believes and why his policies are in keeping with sound economic policy and the tax cut legacy of President Kennedy that we all want to honor and preserve.