Was JFK conservative (on taxes)?

~ Frederic Sautet ~

Fifty years after the death of US President Kennedy, some, such as Ira Stoll in JFK, Conservative, argue that by today’s standards he should be considered a conservative — especially on taxes. Kennedy was a tax cutter (the way President Reagan would be twenty years later) and that makes him a conservative. Is that so?

It is undeniable that Kennedy pushed for a sharp reduction of tariffs and duties on thousands of goods through The Trade Expansion Act of 1962. More importantly, he made the case for personal and corporate tax cuts saying they were (a) good for economic growth, (b) they would eventually pay for themselves, and (c) they were to be permanent and not “quick fixes.” At the time he was elected, the highest federal marginal tax rate on income was 91%, and the lowest was 20% (compared with 35% and 10% today). The corporate tax rate was 52% (35% today) and the capital gains rate 25% (23.8% today). I don’t know the income levels at which these rates cut nor if deductions and shelters were sufficient to reduce the effective rates, but it seems obvious that the federal income tax system was, on principle at least, very punitive. The Revenue Act of 1964 reduced the top income tax rate to 70% and the corporate rate to 48%.

Kennedy found resistance amongst left-liberal economists like John Kenneth Galbraith. Many Democrats didn’t want to give benefits to the rich and opposed any reduction of top tax rates. But many Republicans opposed the project as well on the ground that it would worsen the fiscal situation and have no positive effects on economic performance. “Frankly, we find Mr. Kennedy’s economic theories mystifying,” explained the Republican leader in the House, Charles Halleck (Stoll p. 138). Stoll notes that the Wall Street Journal was also skeptical (p. 134). Interestingly Paul Samuelson and Robert Solow favored tax cuts: “More can be done for confidence by expansionary policies — early tax cuts — than by any feasible alternatives” (p. 130). So why did two of the most prominent Keynesian economists of the time support Kennedy’s tax cuts proposal if this was “conservative economics”?

The 1950s and 1960s were the heyday of Keynesian economics. The issue for everyone was aggregate demand and current expenditure. Galbraith and others wanted to increase the deficit in order to finance higher public expenditures and thus increase aggregate demand. But Kennedy saw a reduction in taxation as a better way to achieve the same objective. A look at the basic Keynesian model explains why. The model describes current expenditure (E) as the sum of three purchases: household (C), business investments (I), and government (G). In addition, household purchase (C) is a function of after-tax income (Y-T), such that:

E = C(Y-T) + I + G

Therefore current expenditure (E) increases with after tax income (provided people don’t hoard the extra income available), business investments, and public expenditure. So it is perfectly acceptable for Keynesians in the 1960s to favor tax cuts in order to prop-up aggregate demand, especially if taxes are high to begin with. This explains why Kennedy favored cutting the top marginal rates because the rich would probably spend the extra net income rather than save it (it would have been different if the top marginal rate was at the level where it is today). “No doubt a massive increase in Federal spending could also create jobs and growth,” explained Kennedy, “but in today’s setting [i.e. very high tax rates], private consumers, employers, and investors should be given a full opportunity first” (p. 136).

Note that the US budget deficit didn’t worsen after Kennedy’s assassination (it was $4.8b in 1963 and remained around that level until 1967) and tax revenue increased in 1964 and 1965, which could tend to show that he was right in saying that the cuts would pay for themselves (this is in contrast to the Reagan years during which the deficit massively increased; but this is another debate).

It seems to me that the only way in which Kennedy could be seen as more conservative than, say, Galbraith is that he focused on household purchases (C) when Keynesian theory is also about investments (I) and public spending (G). In that sense, he was perhaps more an “underconsumptionist” (worried about too little consumption) than a pure Keynesian. But again, considering the tax rates at the time, this is no surprise. Perhaps one could argue that when tax rates are very high Keynesians and supply-siders agree on the positive effects of tax cuts. That maybe so.

PS: See Lawrence White’s book The Clash of Economic Ideas for a remarkable discussion of Keynesian economics.