Objectives of the Kennedy Administration Tax Cut of 1964

In order to evaluate the objectives of the Kennedy administration tax cut proposal we have to look at the state of the economy as President Kennedy entered the White House. President Eisenhower, a Conservative Republican, had preceded Kennedy and believed in "Economic Orthodoxy", meaning less Government intervention to manage the economy, and an overarching trust that the economy can and will automatically correct itself. In following this belief, the Eisenhower administration was plagued by major recessions between 1953 and 1954 and in 1958, thereby leaving office with a legacy of large unemployment, lack of production, as well as a budget deficit.

As the Kennedy administration took office in January 1961, their ultimate economic objective was to determine the correct means to stimulate the current economy while ensuring the sustainment of future economic growth. However, there were differing viewpoints within the administration. The agreement was to bring about economic growth, but the major dilemma was whether to increase the deficit by reducing taxes or by increasing expenditures.

By June 1962, the administration had made the decision that a major tax cut was the best course of action. President Kennedy believed that reducing taxes for lower income families and large corporations would provide more after-tax income in which to reinvest. This increase in disposable income would rejuvenate the economy through an increase in consumption and production. The production increase would reduce the production gap and reduce unemployment, which was another objective of the tax cut proposal. By February 1964, roughly three months after President Kennedy's assassination, the Revenue Act of 1964 was signed into law, recognizing the large-scale tax cuts President Kennedy had lobbied for, substantially reducing taxes for individuals as well as corporations.

There are certain criteria that can be used to measure the success or failure of the tax cut objectives initiated by the Kennedy administration. The primary criteria for success is by attaining an increase in the level of income and production output generated from the subject tax cuts The objective was to increase production sufficiently to diminish any unused capacity and close the production gap. A decrease in the unemployment rate is another measure of success as the administration had the objective of reducing the unemployment percentage to a low 4%. Another criterion the Kennedy administration would have focused on for confirmation of success would have been the length of the expansion period borne from the tax cuts. This would signal that the proposed tax cut would move the economy from a recession to a period of economic growth or expansion. The longer that period extends the greater success the administration would have been able to claim.

Additionally, it could be stated that the longer the expansion, the greater amount of confidence the consumers and corporations would have in the economy. As those confidences were to grow, the expansion would conceivably continue to grow.

If the tax cut proposal caused an early recession or individuals and businesses chose a path of saving versus consumption, then execution of a major tax cut would have been a failed endeavor, as the government deficit would have increased without the benefit of growing the economy.

There were critical issues and assumptions the Kennedy administration had to consider during the tax proposal process for the economic growth of the country. The first issue was whether to use a reduction in tax revenue to stimulate the economy or to increase government spending. Opponents in the administration argued the basic economic principle: that an increase in government expenditure would have a greater benefit and provide the same economic effect as a tax cut. In December 1962, Mr. Walter Heller, Head of the Council of Economic Advisors, recapped in a memorandum to the president the beneficial merits on the Tax Cuts and clarified the "Galbraithian Alternative", which supported an increase in government spending as the most advantageous choice. One of Mr. Heller's primary arguments was that although functionally the two actions could have similar effects, the most noteworthy issue with government spending was that there was not enough time to spend $9 billion in the short-run, one to two years, without creating "waste, bottlenecks, profiteering, and scandal".

The second concern was on the appropriate timing of executing the tax cut. Should it be immediate and sweeping, in order to preempt a recession and lower the unemployment rate as recommended by Mr. Heller, or should it be delayed and gradual, for fear that it could cause rampant inflation as advocated by the Secretary of Treasury, M. Douglas Dillon and Commerce Secretary, Luther Hodges? It also prompted concern at what point of the business cycle could the tax cut be performed. Henry H. Fowler mentioned that the early recovery period of the business cycle would be the best opportunity for a reduction in taxes. As the economy would be in growth phase as reduction in taxes would increase consumer spending from the increase in disposable income.

The third focus of concern was whether or not the tax cut would actually induce consumption or would the substantial increase in after-tax income only induce saving. A supporter of the tax reduction measure cautioned that taxes should be reduced when it is certain that income will go into consumption and not savings. As illustrated in Exhibit A, a reduction in taxes would shift the IS curve to the right causing an increase in income and the interest rate. Supporters of the tax cut measure were hoping that part of this extra income increase would be put back into the economy. The administration also speculated if there were means to entice consumers and corporations to spend rather than to save. The Federal Reserve could also increase the money supply in the economy simultaneously with the proposal tax cut to eliminate the "crowding out" effect. This would shift the LM curve to the right, increase income, while maintaining the interest rate (Exhibit B).

In October 1963 at the Senate Finance Committee hearings, Mr. Leon Keyserling, President Truman's Chairman of the Council of Economic Advisors, strongly suggested that the proposed corporate tax cuts were too high and since corporations were already benefiting from the new depreciation schedules put into effect in July 1962, corporations would not see the benefit of reinvesting.