Meet John F. Kennedy – tax cutter extraordinaire

We are in the process of selecting a new government, including the occupant of the White House. The current resident, a charming and engaging fellow with whom I often disagree, likes to pin our current economic slump on the policies of his predecessor, but he’s never asked to specify.

Since he’s referred to tax rate cuts as “fairy dust,” I’ll assume that’s what he means. My first thought is this: if cutting tax rates was so economically ruinous, why didn’t President Obama either let them expire or pursue legislation to raise them? He’s only talked about raising them, which has caused job creators to hesitate.

Secondly, I wonder if President Obama is aware that President John F. Kennedy, a Democrat, once argued for, and eventually enacted, tax rate cuts? Everyone links modern tax cutting with Ronald Reagan, but President Reagan got the idea from Kennedy, whose views on the subject were outlined in a December 1962 speech to the Economic Club of New York.

We had just gotten past the Cuban missile crisis, and while the economy was growing, Kennedy did not believe it was firing on all cylinders. In a beautifully crafted and delivered speech, which was one of his trademarks, Kennedy made the case for tax rate cuts to, as he correctly put it, “raise our entire economy to a new and higher level of business activity.”

During the speech, Kennedy made a number of assertions that would confound today’s Democrats. I can’t help but think this speech could have been delivered by Governor Mitt Romney or his running mate, Wisconsin Congressman Paul Ryan, and how much the Democratic Party has changed – and not for the better.

Here are some of the more telling excerpts, with comments from yours truly in parentheses:

 • “The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system.” (Sounds familiar, doesn’t it?)

• “Corporate tax rates must also be cut to increase incentives and the availability of investment capital.” (Ditto)

• “The new tax bill should improve both the equity and the simplicity of our present tax system. This means the enactment of long-needed tax reforms, a broadening of the tax base, and the elimination or modification of many special tax privileges. These various exclusions and concessions have been justified [in the past] as a means of overcoming oppressively high rates in the upper brackets, and a sharp reduction in those rates – accompanied by base-broadening, loophole-closing measures – would properly make the new rates not only lower, but also more widely applicable. Surely this is more equitable on both counts.” (A man after my own tax-simplifying heart)

• “Those are the three tests which the right kind of bill must meet – and I am confident that the enactment of the right bill next year will in due course increase our gross national product by several times the amount of taxes actually cut. Profit margins will be improved, and both the incentive to invest and the supply of internal funds for investment will be increased. There will be new interest in taking risks, in increasing productivity, in creating new jobs and new products for long-term economic growth.” (How about a law that requires a new member of Congress to study this speech in a course titled “Growing the Economy 101”?)

And finally, my personal favorites:

• “In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. The experience of a number of European countries and Japan have borne this out. This country's own experience with tax reduction in 1954 has borne this out. And the reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.” (Note the line “only full employment balances the budget.” Rather than raising rates on individuals, why don’t we create more tax payers, i.e. employed people, to feed government coffers?)

• “I repeat: our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy, or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve, I believe — and I believe this can be done — a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future.

“Nevertheless, as Chairman Mills of the House Ways and Means Committee pointed out this week, the size of the deficit is to be regarded with concern, and tax reduction must be accompanied, in his words, by "increased control of the rises in expenditures." This is precisely the course we intend to follow in 1963.” (Another solid point. Tax rate cuts should be combined with spending discipline to execute a devastating one-two punch on the federal deficit)

Game changer

As President Kennedy suggested, it is a paradoxical truth, and I would argue a very inconvenient truth for President Obama and his fellow Democrats, that lower rates increase the incentive to invest and spend, leading to stronger GDP growth, fuller employment, and higher revenue collections for the government.

As I’ve explained before, tax rates are not tax revenue, but one factor in a mathematical equation that leads to a product that is tax revenue. The other factor, the one in which tax rates are applied to, is the wealth factor. In other words, it’s our income and/or wealth assets.

Yes, you can raise more tax revenue by raising tax rates, but eventually you reach a point of diminishing returns as individual incentive to invest and produce wanes over time. In contrast, reducing tax rates, and thereby allowing people to keep a greater percentage of their earnings, is a gift that keeps on giving.

I realize the real “mano-a-mano” is between President Obama and Gov. Mitt Romney, but if I’m Paul Ryan preparing for my debate with Vice President Biden, I include some of the above gems from President Kennedy in the debate and see if the vice president characterizes them as the rantings of an extremist. If Biden takes the bait, and I have no doubt that he will, Ryan then pounces, noting that they were contained in a speech that President Kennedy, a Democrat, used to make the case for a tax cut bill.

I then say the following to Mr. Biden: What makes you and President Obama, given your disappointing economic record, think you know more than political giants like John Kennedy and Ronald Reagan, two presidents whose tax-cutting policies helped create more prosperous times?

Game, set, match.