Kennedy cut tax rates too, and what the 1964 law proves

The next person who tells you that tax cuts are a Republican trick to help the rich deserves a history lesson. The largest top-rate cut of the twentieth century was proposed by John F. Kennedy, a Democrat from Massachusetts, and the law that carried it out was signed by another Democrat, Lyndon Johnson, and passed a Congress controlled by Democrats in both chambers. The top rate fell from 91 percent to 70 percent. If that is a trick for the rich, it is a trick that two Democratic Presidents played on their own party.

I enjoy this story for the obvious reason. It is a delicious little bit of political history that takes the air out of a favourite liberal claim. But I want to tell it straight, because the honest version is more useful than the gotcha. The 1964 law does not prove everything conservatives sometimes claim for it. It proves some things, it fails to prove others, and a debater who knows which is which will beat one who does not.

The world of 91 percent

Start with the number. In 1963, the top federal income tax rate was 91 percent. The top bracket applied to taxable income over a very high line, a few hundred thousand dollars for a couple, so it was never a rate that most families paid. The lowest bracket was 20 percent. And the corporate rate was 52 percent.

Now think about what a 91 percent rate does to behavior. For every extra dollar of income in the top bracket, the taxpayer keeps nine cents. Would you work harder for nine cents on the dollar? Would you take a risk on a new venture? Or would you hire an accountant to find a way to be paid in some form that the Treasury cannot touch? The answer, in the 1950s and early 1960s, was the last one. An entire profession of tax lawyers, deferred compensation plans and shelters grew up around the top bracket, and people with the means to hire them arranged to be taxed at a much lower rate than the law said. The high rate raised little revenue from the very people it was aimed at and a lot of resentment from everyone else.

Try a hypothetical to see the logic. A company wants to reward a top executive. Option one is $100,000 of extra salary. In a bracket where 91 percent goes to the Treasury, the executive keeps $9,000 (0.09 times $100,000). Option two is a package of benefits, a deferred arrangement, or a company-paid perk that the tax code treats more gently, and it is worth even $20,000 to him after tax. A sensible executive takes option two, and a sensible board offers it. The Treasury gets nothing from the $100,000 that was never paid as salary, the executive is better off by $11,000, and the company has spent a fortune on lawyers and benefits consultants to arrange it. Everyone has lost except the lawyers. A tax rate that high does not collect the money; it redirects it into forms the government cannot reach, and it rewards cleverness over work. That is not an argument for any particular rate. It is an argument for looking at the effective rate, the one people actually pay, rather than the one printed in the statute.

That is the background Kennedy inherited. The economy had come out of a recession in early 1961, but unemployment was stubbornly high, and the government's economic advisers, led by Walter Heller of the Council of Economic Advisers, argued that the tax system was acting as a brake on growth.

The speech in New York

On December 14, 1962, President Kennedy went to the Economic Club of New York, a room full of the people who run American business, and made his case. He told them, in effect, that the country had a high-rate system that took too much out of the economy and brought in too little revenue, and that the soundest way to raise revenue in the long run was to cut the rates. I am paraphrasing, and you should read the speech itself in the American Presidency Project's archive for the exact words. The paradox he described, that lower rates could serve the budget's long-run health, is the same paradox that supply-siders would make famous a decade later, and it's a mistake to think that idea belongs to one party.

He followed it with a proposal sent to Congress in January 1963: cut the top rate from 91 to 65 percent and the bottom rate from 20 to 14 percent, with a cut in the corporate rate as well, paid for in part by reforms that would have trimmed some deductions. Congress would change the details. But the architecture was there.

He also gave his argument a line that every politician since has borrowed. In October 1963, at the dedication of a dam in Arkansas, Kennedy said that a rising tide lifts all boats. Remember who said it and where.

The fight in Congress

The proposal went to the House Ways and Means Committee, chaired by Wilbur Mills of Arkansas, a Democrat. The House passed a version in September 1963. Then it went to the Senate Finance Committee, whose chairman was Harry Byrd of Virginia, also a Democrat, and a fiscal conservative of the old school. Byrd would not move the bill so long as the federal budget was growing. He wanted spending restraint first.

Then came November 22, 1963, and the assassination of President Kennedy. Lyndon Johnson took office and made passing the tax cut a priority, partly as a tribute and partly because he saw it as a way to show that he could govern. To get the bill past Byrd, Johnson made a pledge: he would hold the next federal budget below $100 billion. The story goes that he went around the White House turning off lights to show he meant it. Whether or not you believe the lights, Byrd took the pledge, and the bill moved. The Senate passed it in early February 1964, and President Johnson signed the Revenue Act of 1964 on February 26.

Notice what that sequence shows. The tax cut passed because a Democratic President was willing to trade spending restraint for it, and because a Democratic committee chairman insisted on a spending promise. That is not a bad model for how a conservative should bargain today. The price of the tax cut was a budget pledge. You can read about how those bargains are made in How a budget becomes law, from the President's request to the checks.

What the law actually did

The final law cut the individual income tax in two steps, in 1964 and 1965. The top rate came down from 91 to 70 percent. The bottom rate came down from 20 to 14 percent. The corporate rate fell from 52 to 48 percent. The law also made changes to the standard deduction.

Now the arithmetic, which is where the gotcha lives.

1. The percentage cut at the bottom was bigger than the cut at the top. The lowest rate fell from 20 to 14 percent: a drop of 6 points, or 30 percent of the old rate (6 divided by 20). The top rate fell from 91 to 70 percent: a drop of 21 points, which is about 23 percent of the old rate (21 divided by 91). In proportional terms, the lowest bracket got the larger cut.
2. What a family keeps on the last dollar. In the lowest bracket, a worker kept 80 cents of a marginal dollar before the law and 86 cents after. That is 86 divided by 80, a gain of 7.5 percent in what he kept. In the top bracket, an earner kept 9 cents on the marginal dollar before and 30 cents after. That is more than a threefold increase (30 divided by 9 is about 3.3). The top earner's incentive improved by far more, which is exactly what you would expect when a rate is that extreme.

So the claim "Kennedy's cut was only for the rich" fails: every bracket was cut, and the bottom was cut proportionally more. The claim "the big winners were the people at the very top" is true about the marginal incentive. Both facts are in the record, and you should hold both.

What followed, with honest caveats

The economy grew strongly in 1964 and 1965, and unemployment fell, dropping below 4 percent by 1966. Federal revenue in dollars was higher after the cut than before it. Those facts are the ones you see quoted on our side.

Here are the caveats, and I give them to you so you can't be surprised by them.

1. The expansion began before the cut. The recession ended in early 1961. The economy had been growing for three years when the law was signed. The tax cut may have extended and strengthened the expansion, but it did not start it.
2. Rising revenue proves less than it seems. Revenue in dollars tends to rise in a growing economy with a rising price level. The question is whether revenue was higher than it would have been without the cut, and nobody can run that experiment. Economists estimate that part of the cost was recovered through growth, but they do not claim that the law paid for itself.
3. Kennedy's theory was not supply-side doctrine. The Kennedy economists made a Keynesian argument: the economy was operating below its potential, and a cut would boost spending and demand. The supply-siders of the 1970s emphasized incentives to work and invest. The two schools overlap in the policy, a cut, and differ in the explanation. Do not tell a liberal that Kennedy was a Reagan in disguise. He wasn't, and you will lose the argument by overreaching.
4. Vietnam and the Great Society. In 1965 the United States sent large numbers of combat troops to Vietnam, and Johnson launched the Great Society programs, including Medicare and Medicaid. Federal spending climbed, and by the late 1960s inflation was rising. In 1968 Congress passed a temporary income tax surcharge of 10 percent to deal with the deficits. It's a lesson in what happens when the spending pledge that bought the tax cut was not kept.

So the 1964 law supports a modest and sturdy conclusion: lowering high marginal rates can strengthen an expansion, and the idea is not partisan. It does not support the claim that cutting taxes always raises revenue. For that distinction, read The Laffer curve explained, and the claim it never actually made.

The rebuttal to the best objection

The best liberal objection is this one: "Sure, Kennedy cut a 91 percent rate. Nobody is proposing a 91 percent rate now. The evidence from a world of extreme rates doesn't carry over to a world of moderate ones."

That is a good point and a conservative should grant most of it. The effects of a cut depend on where you start. A cut from 91 percent is likely to do more than a cut from 40 percent. I made the same concession about the Mellon cuts of the 1920s, in The Mellon Tax Cuts of the 1920s and What Happened to Revenue.

What survives is the principle, and it is a principle Kennedy stated himself. High marginal rates discourage work, investment and risk-taking, and they invite avoidance. How much they do so depends on the rate and the base. That is the whole claim. It is not a partisan claim; a Democratic President made it, and a Democratic Congress wrote it into law.

How to use it at the table

Here is a plan for the conversation, in five moves.

1. Ask the question first. "Who proposed the biggest cut in the top income tax rate in the twentieth century?" Let the other person guess.
2. Give the answer and the details. Kennedy proposed it, Johnson signed it, a Democratic Congress passed it, and the top rate went from 91 to 70 percent.
3. Anticipate the reply. "That was a different era." Agree that starting points matter, and say the principle survives.
4. Give your own caveats before they do. The expansion started in 1961, Kennedy's reasoning was Keynesian, and the Vietnam and Great Society spending that followed pushed the budget the other way.
5. End with the shared ground. If a Democratic President thought high rates could choke growth, then arguing about rates is not a betrayal of the poor. It is a debate about how best to help them.

For the bigger picture of Republican tax cuts in the same family, see Republican tax cuts side by side, from Harding all the way to Trump, and for a set of common mistakes on all sides, seven tax myths that scare working families and cost them money. And for what Johnson's Congress did in the same year with Republican votes, Republicans Delivered the Votes That Broke the 1964 Filibuster is a story that deserves telling too.

The bottom line

• The Revenue Act of 1964, proposed by John F. Kennedy and signed by Lyndon Johnson on February 26, 1964, cut the top individual rate from 91 to 70 percent, the bottom rate from 20 to 14 percent, and the corporate rate from 52 to 48 percent.
• It was a bipartisan idea from the start, and the price of passage was a spending pledge. That is a model for how a conservative should bargain today.
• Use it to answer the claim that tax cuts are only a Republican trick. Do not use it to claim that tax cuts always pay for themselves. The expansion began in 1961, Kennedy's argument was about demand, and later spending changed the picture.
• Judge the next tax proposal by the principle Kennedy named: does it improve the incentive to work and invest at the margin, and what is the matching plan for spending?
• Read the original speech and the law yourself, and check any claim at Congress.gov or on our elections page for the parties' records. Then tell your family what you found.