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99 IRET Policy Bulletin 1 (2011)

handle is hein.taxfoundation/iretpbul0058 and id is 1 raw text is: _ _ _ _ _ _September 6, 2011 No. 99 ECONOMIC CONSEQUENCES OF THE TAX POLICIES OF THE KENNEDY AND JOHNSON ADMINISTRATIONS Introduction This paper is the first in a series examining federal tax policies implemented from the Kennedy to the G.W. Bush Administrations. This installment estimates the effects of the Kennedy and Johnson Administration tax policies of the 1960s on the U.S. economy and the federal budget. It shows why the design of the Kennedy tax cuts early in the decade made them highly successful in improving the performance of the economy, and reveals which features of the Kennedy cuts were most effective. It discusses the adverse effects of the Johnson surtax of the late 1960s on economic activity. The study utilizes a model driven by the impact of marginal tax rate changes on incentives to work, save, and invest in additional capital formation. This approach can distinguish tax changes that make it more rewarding to produce goods and services from tax changes that merely throw money from the top of the Washington Monument. The incentives approach is consistent with how labor and capital markets and the production process operate in the real world. It is also consistent with the analytical methods taught in business schools to the people who decide how much and what type of capital to create. This is in contrast to Keynesian models which focus mainly on the dollar amount of a tax change, under the erroneous assumption that taxes affect the economy by altering disposable income and aggregate demand, and that the form of the tax and its impact on the supplies of labor, capital, and output are irrelevant. In practice, initial Keynesian demand effects of a tax change are offset by changes in federal borrowing or spending, leaving only the incentive effects of the tax change, if any, to alter behavior. Elements of the Kennedy tax cuts Senator John F. Kennedy was elected President in 1960, defeating Vice-President Richard M. Nixon. Kennedy ran on the promise to get the country moving again, following the third recession of the Eisenhower years. The tax program Kennedy designed largely succeeded in fulfilling that promise. It is a model of what works to encourage faster growth of capital, wages, and employment.1 1 The first recession lasted from July 1953 to May 1954, had a peak unemployment rate of 6.1 percent, and recorded a drop in real output of 2.6 percent. The second recession lasted from August 1957 to February 1958, Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote economic growth and efficient operation of the market economy. on the Economics of 1710 Rhode Island Avenue, N.W., 11th Floor • Washington, D.C. 20036 Taxation (202) 463-1400 • Fax (202) 463-6199 - Internet www.iret.org

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