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Why The Kennedy Tax Cut Never Really Happened

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The U.K.-based Financial Times recently discussed U.S. economic events of the 1960s, including “tax cuts under President John F. Kennedy in 1964.” This statement is surely jarring to Americans for whom the date November 22, 1963 (Kennedy's assassination) is emblazoned in their memories as firmly as December 7, 1941 (Pearl Harbor) and September 11, 2001 (coordinated terrorist attacks in the U.S.). The tax cut proposed by Kennedy was pushed through Congress after his assassination by President Lyndon B. Johnson.

The FT’s slip is understandable. Among homegrown references to the Tax Reduction Act of 1964, the Minneapolis Star Tribune’s recent comment is not unusual: “For the five years following the Kennedy tax cuts in 1964, average disposable income went up $2,243 per American.” (Italics added.)  This widespread misnomer is no accident.

LBJ Made It Happen

Beginning in the 1970s, spurred on by Congressman Jack Kemp, Republicans campaigned for a tax reduction that eventually materialized under President Ronald Reagan in 1981. The Republicans astutely wrapped themselves in JFK’s mantle, implying that the martyred Democratic president shared their supply-side principles. Never mind that Kennedy was actually a Keynesian or that the tax cut probably would not have survived in the form he envisioned, if it had passed at all, without LBJ’s masterful political skills.

As Johnson biographer Robert Caro has recounted, LBJ grasped an essential point that Kennedy’s team did not: A major sacrifice of tax revenue could not make it through the Senate Finance Committee unless the administration bowed to Chairman Harry Byrd’s insistence on capping federal spending at $100 billion. LBJ unleashed all his powers of persuasion—and intimidation—on his cabinet members, who delivered sufficient expenditure cuts to lower the budget to $97.9 billion.  Satisfied that he had compelled a president to reduce spending, Byrd cast a key vote in committee against amendments that would have undone LBJ’s hard work. That victory for Johnson cleared the way for the bill’s eventual passage in the full Senate.

How quaint this all sounds today! The current debate focuses only on how big a hole the tax cut will blow in the budget. Byrd never heard of dynamic scoring and would have rejected the idea out of hand. LBJ knew that Byrd had to be certain that the $100 billion target was met without resorting to accounting gimmicks, hence his pushing the budget $2.1 billion below the Senate finance chief’s threshold.

Denying Credit Where Due

To this day, Republican advocates of tax cuts are loath to give Johnson credit for succeeding where Kennedy might well have failed. That might give people the idea that the prosperity that followed the 1964 tax cut had something to do with the fiscal impact of LBJ’s decision to escalate spending on the Vietnam War without reining in Great Society social spending.

The lesson Republicans instead want voters to learn from the 1960s is that cutting taxes stimulates economic growth, in turn boosting tax revenue. It is no more than an inconvenience that the Congressional Budget Office concluded in 1978 that most of the rise in tax revenue following the 1964 legislation resulted from economic growth that would have occurred without a tax cut. (Even at that, CBO estimated that the revenue gains offset only 25% to 75% of what the tax cut sacrificed.)

Aside from the economic arguments, Republicans have soft-pedaled Johnson’s role in the 1964 tax cut because it is less advantageous to associate themselves with him than with the more fondly remembered Kennedy.  LBJ’s popularity has never recovered from the national trauma of the Vietnam War. (JFK’s partisans have been somewhat successful in selling the historically dubious claim that he was planning to withdraw U.S. troops when he was assassinated.)

However one may judge Johnson’s presidency, he deserves credit for the major reduction in taxes in the early days of his administration.  It was therefore refreshing to hear Fox News talking head John Layfield acknowledge, on the December 9 Bulls & Bears program, that although John Kennedy initiated the 1964 tax cut it was Lyndon Johnson who saw it through.

 

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