Conservatives and Republicans like to point to President John F. Kennedy’s unsuccessful efforts to cut income tax rates—that’s right, unsuccessful. It was Kennedy’s successor, President Lyndon Johnson, working with Senate Finance Committee Chairman Harry Byrd, Virginia Democrat, who pushed through the 1964 cuts in personal and corporate income tax rates. And they cut government spending to boot.
Johnson wanted the tax cuts in order to stimulate economic growth, while Byrd demanded spending cuts and favored a balanced budget, because he thought that was the fiscally responsible thing to do. They compromised by including both provisions, and the economy took off as a result.
You sure don’t hear Democrats demanding tax and spending cuts anymore. President Obama is on yet another of his we-need-higher-taxes tours, and Senate Majority Leader Harry Reid has suggested that $1 trillion in new federal revenue would be a good start—not to balance the budget but so the government can spend even more.
Kennedy made his pitch for both individual and corporate tax cuts in his 1963 State of the Union address, but failed to get his proposal passed before the November assassination. And even though Kennedy usually receives the credit, it was actually Johnson who successfully maneuvered the tax and spending cuts through Congress with bipartisan support.
Under the Revenue Act of 1964, the top income tax rate fell from 91 percent to 70 percent, and the bottom bracket dropped from 20 percent to 14 percent by 1965. The corporate rate fell from 52 percent to 48 percent.
Johnson’s economic team, which was mostly made up of Kennedy’s pro-Keynesian advisers, wanted to increase federal spending to perhaps $102 billion or even more.
But Byrd wanted to keep federal spending under $100 billion, which meant cutting $3 billion to $4 billion from most of the budget proposals floating around the White House—a lot of money in 1964.
When Johnson gave his first State of the Union address in January 1964, he called for an actual reduction in the federal budget—not just a slowing of the rate of growth—as well as a reduction in the federal workforce. Talk about a radical! Was Johnson a member of the Tea Party?
After reminding the country that there were 4 million Americans still unemployed, Johnson explained it was time to get the country working again.
“That tax bill has been thoroughly discussed for a year. Now we need action. The new budget clearly allows it. Our taxpayers surely deserve it. Our economy strongly demands it. And every month of delay dilutes its benefits in 1964 for consumption, for investment, and for employment.
“For until the bill is signed, its investment incentives cannot be deemed certain, and the withholding rate cannot be reduced—and the most damaging and devastating thing you can do to any businessman in America is to keep him in doubt and to keep him guessing on what our tax policy is.”
And remember, Johnson cut the highest income tax rate the most—exactly the opposite of Obama’s soak-the-rich demands.
After passage, unemployment fell from 5.2 percent to 4.5 percent in 1965, and even further to 3.8 percent in 1966. And while estimates projected federal revenues would drop, income tax revenue actually increased. In 1963, before the bill was passed, federal income tax revenue was $69.2 billion. In 1964, the first year after the bill took effect, revenues jumped to $72.2 billion, and hit $85.5 billion in 1966.
To be sure, Johnson used that same State of the Union speech to call for a “war on poverty”—a “war” that we’ve lost, badly—and he proposed lots of new liberal programs.
But that’s the point: Johnson was a self-described liberal Democrat—often pointing to his long, close relationship with President Franklin Roosevelt. And Harry Byrd was a conservative Democrat. And they came to an agreement on tax and government spending cuts as a way to boost the economy and keep the country financially sound.
Of course, Obama might respond that he would love a 70 percent income tax rate on the wealthiest Americans. However, there were so many deductions and exemptions then that the effective rate was much lower. It was the downward trend that spurred economic growth. Obama has been demanding an upward swing.
Which brings us to the last point: while cutting high tax rates is good for economic growth, simplifying the tax code with lower rates and fewer (or no) deductions would be even better. It took a Ronald Reagan to do that, in his Tax Reform Act of 1986, which also passed with bipartisan support.
But, sadly, Barack Obama is no Ronald Reagan, nor, as have learned, a Jack Kennedy, nor even an LBJ. Which means we won’t likely see a real economic boom until we get someone who is.