JFK, Reagan and Supply-Side Tax Cuts

March 8, 2018

by Eric Schansberg, Ph.D.

Larry Kudlow and Brian Domitrovic (KB) have written JFK and the Reagan Revolution — a helpful history on their dramatic “supply-side” reductions in marginal tax rates. Bringing JFK into this discussion is particularly helpful in dealing with partisans (dramatic tax cuts have not simply been a GOP thing), folks who are focused on income inequality (given the policy’s supposed contributions to income inequality and inequity), and statist ideologues (who prefer higher income taxes as both a means and an end).

Today, Reagan gets far more attention for his tax cuts than JFK, probably because his policy move was more recent (1980s versus 1960s), more dramatic in terms of the numbers (dropping the top rate by 60 percent versus 30 percent), and more important for our economy (especially in light of the contemporary economic woes [183]). Still, JFK’s effort was far closer to Reagan’s than the tax-rate tweaks of other post-WWII presidents.

Likewise, the effects of the JFK tax cuts are more difficult to assess. His economy was not nearly as rough as what Reagan inherited from Carter. And the rise of the 1960s saw a range of countervailing economic policies that would have mitigated the effects of the tax cut — whereas

Reagan’s overall economic policy legacy was cleaner. KB note dramatic changes in government spending in the 1960s (161). LBJ increased the top MTR (marginal tax rate) temporarily for 1968-1970 (166). Nixon implemented the alternative minimum tax, increased capital gains tax rates, encouraged an increasingly profligate monetary policy, and returned us to a regime of wage/price controls in the face of troubles with OPEC (166-170).

KB’s book also affords an opportunity to promote some Econ101 literacy. Tax cuts come in two basic varieties: “Keynesian” and “Supply-side.” The former are named after the school of thought that became dominant in the 1930s but was decimated in the late 1960s (by economic theory) and the 1970s (by the data). For the macroeconomy, Keynesians emphasize the primacy of consumption (over investment). They embrace government activism in terms of (expansionary) fiscal policy. They have relatively little faith in market processes and relatively great faith in the knowledge and motives of government agents. (This would be a fun tangent to pursue. But here, it suffices to note that faith in government — knowledge and especially motives — has faded considerably over the last 50 years, given the historical data.)

For Keynesians, tax cuts are seen merely as a vehicle for increasing consumption to stimulate the economy. If I reduce your taxes, you will buy more stuff, increasing consumer demand and boosting the economy. Supply-siders acknowledge the consumption angle. But they also recognize the implications for the “supply side” of the economy. (The term was coined by June Wanniski in 1976 [181].) If tax cuts reduce marginal tax rates, then people will be allowed to keep a higher proportion of the fruits of their labor. Beyond more consumption, this incentivizes them to be more productive, work harder, be more entrepreneurial, engage in less tax avoidance and tax evasion — all good stuff for people and an economy.

The modest tax rate changes of other presidents should cause modest results. But JFK and Reagan made dramatic changes that would be expected to yield dramatic results. JFK reduced the top marginal tax rate from 91 percent to 70 percent. Reagan and a strongly-Democratic House reduced the top rate to 28 percent. (The 1986 tax cuts passed the Senate 97-3 [215-216]) Reagan used to talk about movie stars in 1950s Hollywood who only made one movie per year. Much of their income was taxed at the various marginal tax rates (tax brackets) before the last dollars were taxed at 91 percent. But if they made a second movie, all of their income would have been taxed at 91 percent. Who would do that?

Arthur Laffer came up with the Laffer Curve, famously drawing it on the back of a napkin (182). It illustrates the necessarily U-shaped relation between tax rates and tax revenues. To note, if tax rates are 0 percent or 100 percent, you’ll collect no revenue. It follows that for rates up to a certain amount, higher rates will yield higher revenue. Beyond that point, higher rates will yield lower revenues. In contemporary terms, it’s difficult to imagine that the Bush I, Clinton, and Obama MTR increases were helpful or even all that relevant. Supply-side arguments can be exaggerated and abused. It’s unlikely that the relatively modest tax cuts of Bush II and Trump are a big deal either.

So, we might debate the size of supply-side effects, but their existence is not debatable. Often, “supply-side” is used as a term of derision, as if it’s ridiculous. Instead, what’s ridiculous is to deny their existence. (Perhaps we should call these people “supply-side deniers”?) Supply-side tax cuts are often referred to as “trickle-down.” (Or do you remember Bush I’s references to it as “voodoo economics”? The only voodoo was in Bush’s numbers: KB note that he predicted 30 percent inflation from 30 percent MTR cuts [207]) No economist will use that term: it’s too vague and too colorful! When you hear it, you can trust that you’re listening to a rube or a demagogue.

Eric Schansberg, Ph.D., an adjunct scholar of the foundation, is professor of economics at Indiana University Southeast in New Albany.



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