JFK, the demand-side tax cutter.

The history behind current events.
Jan. 16 2004 11:00 AM

Tax Cuts in Camelot?

JFK lowered taxes, but supply-siders wrongly claim he's their patron saint.

Does this man look like a Reaganite?
Does this man look like a Reaganite?

Since the drive to pass Ronald Reagan's tax cuts in the 1980s, Republicans have often invoked John F. Kennedy as the patron saint of supply-side economics. For several years now, conservative groups such as the National Association of Manufacturers and the Club for Growth—the supply-side group whose name sounds like a hair-replacement outfit—have used JFK's name and words to depict Republican tax cuts skewed toward the rich as part of a grand bipartisan tradition. (In 1997 in Slate, Democratic strategist Bob Shrum dissected one of these ads.) Now the Club for Growth's Stephen Moore is enlisting JFK to take a swipe at Howard Dean's economic vision in the Wall Street Journal, declaring it anti-growth, burdensome to the middle-class, and in an oh-so-painful concluding slap, final proof that the Democrats "no longer believe a word of John F. Kennedy's message of 40 years ago."

So, was Kennedy really a forerunner to Reagan and Bush? Or are supply-siders just cynically appropriating his aura? The Republicans are right, up to a point. Kennedy did push tax cuts, and his plan, which passed in February 1964, three months after his death, did help spur economic growth. But they're wrong to see the tax reduction as a supply-side cut, like Reagan's and Bush's; it was a demand-side cut. "The Revenue Act of 1964 was aimed at the demand, rather than the supply, side of the economy," said Arthur Okun, one of Kennedy's economic advisers.

This distinction, taught in Economics 101, seldom makes it into the Washington sound-bite wars. A demand-side cut rests on the Keynesian theory that public consumption spurs economic activity. Government puts money in people's hands, as a temporary measure, so that they'll spend it. A supply-side cut sees business investment as the key to growth. Government gives money to businesses and wealthy individuals to invest, ultimately benefiting all Americans. Back in the early 1960s, tax cutting was as contentious as it is today, but it was liberal demand-siders who were calling for the cuts and generating the controversy.

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.

Many liberals disliked Kennedy's plan on grounds of equity. Leon Keyserling, an economist who had served Harry Truman, lamented that the richest 12 percent of Americans would get 45 percent of the benefits. Michael Harrington, the scholar of poverty, called the plan "reactionary Keynesianism." The AFL-CIO came out against it.

That Kennedy had to rebut charges of unfairness from his left flank seems to lend credence to the supply-siders' analogy with Bush. But that analogy omits the additional fact that Kennedy's toughest opposition came from business. Corporate America distrusted Kennedy, especially after he took on the steel industry in 1962 for raising prices. A June 1962 poll showed that 88 percent of businessmen viewed him as hostile to them. Motivated by a mixture of traditional balanced-budget conservatism and personal distrust, many of them voiced opposition to the cuts.

Kennedy took pains to sell the package to the business world. Departing from the more representative rhetoric of his June 1962 Yale commencement speech, he deliberately dressed up his program in language he thought business would like when he addressed the New York Economic Club in December 1962. He noted that the then-current system "reduces the financial incentives for personal effort, investment, and risk-taking." As his speechwriter Ted Sorensen later explained, "It sounded like Hoover, but it was actually Heller." According to historian David Shreve of the Miller Center for Public Affairs—on whose excellent work I've drawn here—it is from this December 1962 speech that the supply-side appropriators of the Kennedy mystique usually cull their quotations. They skirt the ample documentary evidence showing that the pro-business rhetoric of the Economic Club speech was largely strategic.

There's a final problem with portraying Kennedy as the ideological kin of Reagan and Bush on tax policy. Kennedy, it turns out, initially wanted to use government spending, not tax cuts, as the means to put dollars in people's hands. But that idea ran aground in 1962 because conservatives in Congress opposed it, while the president's aides feared that the bond market might respond to additional spending with higher rates that could offset their gains. Still, even as Kennedy accepted tax reduction as the first step along the route to growth, he never gave up his spending idea. "First, we'll have your tax cut," he told Heller; "then we'll have my expenditures program."

Like scripture, it seems, John F. Kennedy can be quoted for many purposes.

For more on the subject, see Shreve, "President John F. Kennedy and the 1964 Tax Cut," (Miller Center Report, Spring, 2001); Allen J. Matusow, The Unraveling of America (1984); and Herbert Stein, Presidential Economics (1984). Thanks to David Shreve, Alan Meltzer, and Jonathan Chait.

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