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6 Lessons from JFK on Tax Policy

Diana Furchtgott-Roth | 11/22/2013 |

With fourth-quarter GDP growth estimated at less than 2%, an unemployment rate above 7% for almost five years, and the lowest percentage of Americans employed or looking for work since 1978, America needs lessons from President John F. Kennedy.

Here are six lessons from Kennedy, who was assassinated 50 years ago today.

Lesson 1: Economic growth creates jobs

Kennedy, dissatisfied with economic growth rates of 2%, wanted four or five percent growth. Speaking on the Indianapolis radio station WTTV on Oct. 4, 1960, he said “In order to maintain full employment in the 1960s, which, after all, must be the object for all of us, we are going to have to have an economic growth twice what we had last year, about 4.5% per year instead of 2.4%.”

Kennedy continued, “We have to secure 25,000 new jobs a week for the next 10 years in order to provide jobs for all of the people coming into the labor market. That is a terribly difficult task at a time when automation and new machinery has taken the jobs of men. And at the present rate of economic growth or productivity increase, we are not going to have those jobs for people.” Read JFK’s remarks here.

The labor force in 1960 was 70 million, now it is 156 million. Kennedy needed 25,000 jobs a week in the early 1960s. In 2013, America needs about 50,000 jobs a week, or 200,000 a month, to generate employment in an expanding economy with a growing population. That does not even count replacing the 1.5 million jobs that disappeared during the 2007-2009 recession.

 

 

Lesson 2: Lower taxes stimulate economic growth

Kennedy eloquently described the potential effects on economic growth of reducing taxes. When people have more money, they spend it, generating additional tax receipts.

On Sept. 18, 1963, he said, “A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”

In 1963, he suggested cutting individual income taxes from a range of 20% to 91% to a range of 14% to 65%. Kennedy wanted to lower the top corporate tax rate from 52% to 47%.

Lesson 3: Tax havens attract multinationals

Kennedy understood the role of corporate tax rates in attracting foreign investment. In a message to Congress on taxation on April 20, 1961, he said, “In those countries where income taxes are lower than in the United States, the ability to defer the payment of U.S. tax by retaining income in the subsidiary companies provides a tax advantage for companies operating through overseas subsidiaries that is not available to companies operating solely in the United States. Many American investors properly made use of this deferral in the conduct of their foreign investment.”

Note that Kennedy said “investors properly made use of this deferral.” These days, investors are often attacked for seeking low-tax locations.

Today the top American corporate federal tax rate is 35%, compared to the 24% average of the countries in the Organisation of Economic Cooperation and Development. Although President Obama and the leaders of the congressional tax-writing committees agree that U.S. corporate tax rates are well above average and discourage U.S. investment, they have not succeeded in reducing them.

Lesson 4: High taxes slow capital formation

The disincentive effects of high taxes for investment in plant and equipment was a constant theme in Kennedy’s presidency. Kennedy advocated an investment tax credit to encourage capital formation. Although it would have been more efficient to allow capital to simply be expensed, an investment tax credit is better than nothing.

On Feb. 13, 1961, in a speech to the National Industrial Conference Board, Kennedy said, “We must start now to provide additional stimulus to the modernization of American industrial plants ... I shall propose to the Congress a new tax incentive for businesses to expand their normal investment in plant and equipment.”

And on Jan. 23, 1963, he said, “The present tax codes ... inhibit the mobility and formation of capital, add complexities and inequities which undermine the morale of the taxpayer, and make tax avoidance rather than market factors a prime consideration in too many economic decisions.”

Lesson 5: High taxes reduce risk-taking

Well before economics professors William Gentry of Williams College and Glenn Hubbard of Columbia University documented the negative effects of high taxes on risk-taking and entrepreneurship, Kennedy wrote in a Jan. 24, 1963, message to Congress, “Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort — thereby aborting our recoveries and stifling our national growth rate.”

When taxes are higher, risk-taking is reduced, because a larger portion of the payoff from risk is taken by the government. Rather than risk capital, people prefer the safer stream of income that comes from wages and salaries. Yet entrepreneurs add to the growth of the economy by using their ideas to create new firms, and often new jobs. The success of Apple, Twitter, and Google offers just a few examples of the payoff to new ideas. If Apple co-founder Steve Jobs had simply taken a job with IBM, the development of the computer industry would have been far slower.

Lesson 6: Lower taxes generate more revenue for Uncle Sam

Kennedy was one of the first presidents to articulate a supply-side theory. On Nov. 20, 1962, at a news conference, he said “It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now ... Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

Kennedy’s tax cuts were not passed by Congress until after his death on Feb. 26, 1964, in the Revenue Act of 1964. The bill reduced the top marginal rate from over 90% to 70%. Tax revenues increased from $94 billion in 1961 to $153 billion in 1968, and the new rates led to a greater percentage of tax revenue coming from those making over $50,000 a year. Tax receipts from those making over $50,000 rose 57%, whereas receipts from those making under $50,000 rose 11%.

Ira Stoll, author of “JFK, Conservative,” told me “Kennedy’s tax cuts were the model for Reagan’s, and they did exactly what Kennedy predicted they would — lead to economic growth so vigorous that federal revenues ended up rising even at the lower tax rates. Kennedy wanted to cut not just the 91% income tax rate to 65%, but also the 25% capital gains rate to 19.5% — lower than the 23.8% top rate now under President Obama.”

After the tax cuts, real GDP grew at 5.8% in 1964, 6.5% in 1965, and 6.6% in 1966. The unemployment rate declined from 5.2% in 1964 to 3.8% in 1966, falling all the way to 3.5% in 1969. Although Kennedy did not live to see it, the rest of us did. 

 

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.

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