Driven by the advice given by Keynesian economist Walter Heller, president John F Kennedy proposed a tax cut in his address to the nation on 13th August 1962. Kennedy’s tax cut brewed amidst a sluggish recovery from the 1960–61 recession of the US economy, and the adjacent political forces that compelled JFK to initiate the decision after a marginal victory in the elections, and a strained relationship with the business community amidst growing spats with American steel producers. With the promise of “Let’s make America moving again”, John F Kennedy or JFK won the 1960 presidential election, and then In 1964, he introduced one of the largest American tax cuts, known as the “Kennedy Tax Cut” or “Revenue Act of 1964”. The recessionary trend occurred in the backdrop of a tightened monetary policy of 1959, which had an adverse impact on the real GDP, inducing a contraction of 1.6%, with a corresponding unemployment rate of 6.9%. This recession was also known as the “rolling adjustment” for many major U.S. industries, including the automotive industry. Americans began shifting to buying compact and often foreign-made cars and industry drew down inventories. Gross national product (GNP) and product demand declined. The poor market sentiments fuelled the need for expansionary fiscal policy, with the goals of the tax cuts being: raising personal incomes, increasing consumption, and increase in capital investments.
The US economy was growing at 2.4% at the starting of 1960. But there weren’t enough jobs for people joining the labor force, for maintaining full employment they needed a minimum of 4.5% economic growth. The labor force in the 1960s was 156 million, Kennedy needed 25,000 jobs a week to achieve the targeted growth. The events that unfolded in the coming years supplemented the efforts: The Federal reserve sold gold worth 12 billion, thus devaluing the currency, and boosting the output in the economy.
The provisions of the tax cut broadly encompassed:
- Reduced top marginal rate (on income over $100,000, roughly $770,000 in 2015 dollars, for individuals; and over $180,000; roughly $1,380,000 in 2015 dollars, for heads of households) from 91% to 70%
- Reduced corporate tax rate from 52% to 48%
- Phased-in acceleration of corporate estimated tax payments (through 1970)
- Created minimum standard deduction of $300 + $100/exemption (total $1,000 max
This bill included a tax proposal that reduced the top marginal tax rate from 91 percent to 65 percent, and lowered the corporate tax rate from 52 percent to 47 percent; in total, the cut was projected to decrease income taxes by about $10 billion and corporate taxes by about $3.5 billion. Republicans revolted and blocked the bill in Congress, helping Lyndon B Johnson a key legislative victory before the election of 1964. This bill passed the Congress on 26 February 1964 and became law when president Johnson signed it.
The figure clearly shows the changes in there is a decline in the marginal and average tax rates in the US economy, which have effectively translated into higher disposable incomes (discussed later) for consumers and greater corporate profits, stimulating spending by both stakeholders.
Unemployment fell from 5.2% in 1964 to 4.5% in 1965 and fell to 3.8% in 1966. Initial estimates predicted a loss of revenue as a result of the tax cuts, however, tax revenue increased in 1964 and 1965. Quoting John F Kennedy “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”.
The graph evidences the fact that the rise in disposable incomes corresponded to a rise in real consumption. All these instances of increased aggregate demand stimulated an expansion in the US economy, and evidence shows that the anticipated goals were exceeded by a large degree with the combination of tax cuts and domestic spending programs President Johnson advocated, such as Medicare. The polls showing 60% of Americans favouring the move is a testimony to the success of the tax cut. As the world surrenders to the aftermath of coronavirus pandemic, fiscal therapy is definitely essential to bolster consumer confidence. The American economy has been a subject of many recessions, but the fact lies in the achievement in its recovery