by Ted Sorensen
THE 1963 TAX BILL
Nevertheless that drab speech, and the aforementioned June 7 opening press statement on taxes, laid the groundwork for one of the boldest and most far-reaching domestic economic measures ever proposed—the $10 billion tax cut bill of 1963, offered without experiencing or even predicting for the immediate future any of the three traditional occasions for a tax cut: a Budget surplus, a reduction in spending or a recession. While it would be convenient to assert that this bill was conceived solely by President Kennedy as a defiant challenge to the fiscal troglodytes, or that massive tax reduction to keep the expansion going had long been his plan for 1963, the actual facts are more haphazard.
The origins of that bill can be traced to the preinaugural task force on taxation, commissioned by the President-elect and headed by Professor Stanley Surrey, who was later Assistant Secretary of the Treasury. That report, like the President’s comprehensive Message on Taxation in April, 1961, recommended without details a sweeping, long-range, tax reform bill which would broaden the tax base by closing loopholes, end all inequities of benefit to the few, and thereby make possible lower rates for all. It was a tax reform bill, not a tax cut, and while it was agreed by Surrey and Dillon that the reforms would make possible the same amount of revenues at lower rates, and could only be passed with the help of such a “sweetener,” there was no mention or intention at that time of reducing the government’s net take. The President publicly emphasized, in fact, that with “budget problems as difficult as they are…we cannot carry out a tax reduction in these critical times.” He planned to offer this bill in January, 1962, enabling the Congress to concentrate in 1961 on the “little” tax bill, a bill designed to help the economy and balance of payments with no net loss of revenue. In the unlikely event that he could achieve a Budget surplus, he planned a tax cut and a debt reduction as well.
But the “little” bill did not pass until late in 1962, making impossible the proposal of a larger, more controversial tax reform before January of the following year. Meanwhile the President was rejecting Walter Heller’s advocacy of a quickie tax cut in the spring of 1961 and the summer of 1962. But even as he rejected them—and particularly as he listened to the arguments against a temporary tax hike in the 1961 Berlin crisis—the President gave thought to a favorite Heller theme: namely, that the Federal tax rates, established in wartime to prevent inflation, were taking in so much money as the economy recovered that they were draining off the private funds needed for full growth. Heller wanted a quickie tax cut as a down payment on a permanent reduction.
Between the two crucial meetings in the late spring of 1962—the first held just after the stock market tumble and the second just before the President’s June 7 press conference—Douglas Dillon, aware of the strength in Heller’s argument, and trying to fight off a temporary tax cut that might block the 1963 reform bill, accepted the view that the 1963 bill should provide a net tax reduction. In a speech on June 4 he said that reforms would offset reductions in the 1963 bill “in whole or in part.” But in our June 6 meeting it became “in part”—not because he was as yet an advocate of massive tax reduction, but because he thought a small net reduction would help pass tax reforms.
On the following day the President, seeking to give the nation more cause for confidence after the drop in the market and the pause in the economy, and seeking to answer public pressures for a tax cut that summer, included in his press conference review of the economy an almost hidden pledge:
Three: A comprehensive tax reform bill… will be offered for action by the next Congress, making effective as of January 1 of next year an across-the-board reduction in personal and corporate income tax rates which will not be wholly offset by other reforms—in other words, a net tax reduction.
The emphasis was still on tax reform but the commitment had been made. The August economic “fireside chat” gave slightly more prominence to a tax cut but no more details: “An across-the-board, top-to-bottom cut in both corporate and personal income taxes…a creative tax cut creating more jobs and income and eventually more revenue.” It also cited the Heller doctrine that “our present tax system is a drag on economic recovery and economic growth, biting heavily into the purchasing power of every taxpayer and every consumer.”
Nevertheless the President remained unenthusiastic, if not skeptical, about tax reduction. He still thought in terms of tax reform more than a tax cut for 1963. He was committed to no figure. He barely mentioned it in the mid-term campaign. Division, moreover, was deep within the administration and its advisers. Some economists wanted all reforms dropped as too controversial a drag on the tax cut. Some department heads wanted the cut small to prevent its reducing room in the Budget for their programs. Some wanted cuts and reforms in separate bills. The Vice President argued that oil depletion reforms would handicap the whole bill. There were arguments over whether to include corporations at all, whether to exclude all but corporations, whether to stretch the cut over two or three years or include it all immediately, whether to concentrate on lower-bracket or high-income relief.
But when the bill was finally hammered out, first in Washington and then in our annual planning sessions in Palm Beach over the holidays, the internal arguments had largely vanished. It was the classic example of everyone getting something and no one getting everything. All agreed that the economy needed a boost, that many tax reforms would help growth and that a wholesale reduction in tax rates was the best reform of all. Proposals for rate changes, reforms, the Budget and the statutory debt limit were all juggled, rearranged and revised in relation to each other, as the President insisted that Eisenhower’s $12 billion deficit could not be exceeded, that “civilian domestic” spending had to decline, and that the Budget could not create headlines by going over $100 billion. He knew the Budget had to grow if the economy was to grow. But he felt that passage of the tax bill was far more important to our economic growth than the difference between his proposing spending estimates of $98 billion instead of $100 billion, and that the latter figure was sufficiently more dramatic that it should be avoided.
Throughout the fall, however, as these agreements were reached, the President, preoccupied with the Cuban missile crisis, was still almost indifferent to the tax bill. With the help of his newly enacted tax incentive for investment, continued liberal credit and increased public spending, the dark clouds of recession which had first caused all the tax talk had vanished. The stock market was climbing again. The growth of the economy was still too slow to create enough jobs, but that seemed a difficult premise on which to sell to the Congress a far-reaching bill of this kind.
The President did not become fully enthusiastic until December, and it was the convincing effect of one of his own speeches that helped convince him. The speech, designed to unveil the basic tax and Budget outlines, was delivered to a conservative gathering of mostly Republican businessmen, the Economic Club of New York. The President realized that the economy had resumed its growth and that any attempt to use an antirecession justification for his bill would seem strained. He planned to talk instead of “the burden on private income and the deterrents to private initiative imposed by our present tax system…that…reduce the financial incentives for personal investment, effort and risk-taking.” It sounded like Hoover, but it was actually Heller.
Earlier in the week, the words of Wilbur Mills in a magazine interview had been interpreted as opposition to any tax cut unless it was accompanied, as it could not be, by a Budget cut. But Mills, with whom the President had been in close contact, had actually used the words “increased control of the rises in expenditures.” And in his Economic Club speech the President revealed the planned reduction in nondefense spending as well as other increased Budget controls.
Ken Galbraith, stopping by the White House from India as the speech was being finished, called it “the most Republican speech since McKinley.” He preferred releasing into the economy an additional $10 billion in Federal expenditures, on top of normal Bu
dget increases, instead of a $10 billion tax cut. But the President felt that that alternative was unobtainable in the Eighty-eighth Congress (and told Galbraith he had usually found it helpful to have his lanky friend on the other side anyway). The key member of the Senate Finance Committee on whom the President was depending, Senator Robert Kerr of Oklahoma, also made suggestions for the speech, shortly before he entered the hospital from which he did not emerge. Mills read it without commitment. Dillon, Heller and others all added their views.
But the man most concerned about the speech was the President. He worried less about the policy than the Economic Club audience, wondering how they would swallow a large tax cut at a time of increasing deficits, increasing expenditures and increasing prosperity. “If I can convince them,” he said as we reviewed the final draft in his New York hotel room, “I can convince anybody.”
He did convince them. The speech—sounding, said Time magazine, like that of an officer of the National Association of Manufacturers—was well received (partly because it gave no details on either reforms or the size of the deficit). The President’s own enthusiasm grew. He began to look to the tax cut as his most potent weapon against the persistent unemployment still plaguing him. He began to concentrate on it in his conferences, his speeches, his Budget, his legislative program and his State of the Union Message; and tax cuts, rather than tax reform, dominated his talks about the bill.
But the public was initially indifferent, and despite broad business and labor support the Congress was still far from enthusiastic. If Congress had been unwilling to pass a tax cut the previous summer when recession threatened and the Budget (as proposed) was in balance, why did Kennedy think he could suggest a cut in 1963, when no recession threatened and the Budget was both larger and out of balance? Almost every Democrat had some better scheme for reducing rates. Almost every Republican denounced the Budget. Almost every lobby group denounced one or more reforms. The difficulties encountered by the “little” reform bill of 1962, which limited expense account abuses and cracked down on overseas tax havens, were minuscule compared to the opposition to the new reforms. Every legislator’s favorite reform closed some other legislator’s favorite loophole. And even the tax cut created quarrels among its supporters as to whether business or low-income groups were getting too large a share. Congressmen perfectly willing to leave farm, military and other policies to the more specialized committee members had no hesitancy in feeling expert on tax changes.
The Republicans called the tax cut the “biggest gamble in history” and predicted that unemployment would not decline. But having long talked about removing the heavy hand of government, they were unable to quarrel with the President’s reasons for a tax cut and quarreled instead with the Budget. We had strained painfully but successfully to reduce that Budget to meet the three Presidential limitations earlier mentioned. But Everett Dirksen called it “incredible,” Clarence Cannon called it “monstrous” and Charles Halleck said it made “a mockery of the administration’s brave talk.” The President calmly emphasized that the choice was not between a Budget deficit and a Budget surplus but between two kinds of deficits—one from “waste and weakness” as the result of slack growth and lagging taxable income and one “incurred as we build our future strength” on the way to a full-employment economy. With full employment, he said, we would have no deficit, but delaying a tax cut until expenditures could be equally cut meant waiting until our population stopped growing and the Communists stopped threatening.
Then former President Eisenhower entered the fray with a letter to Halleck. He called the combination of “a massive deficit…lavish new spending and a huge tax cut…fiscal recklessness,” leading in time not to “a free country with bright opportunities but a vast wasteland of debt and financial chaos.” He endorsed a cut of some $13 to $15 billion from Kennedy’s Budget. “May I stress,” said the former Republican President in closing to the Republican House Leader, “there is not a trace of partisanship in the views here expressed.”
The President made no direct reply. But a few weeks later, in answering a question from the nation’s editors, he reviewed both the Budget economies he had made and the necessity of major Budget increases, and then added, without a trace of partisanship:
I am strongly against the wholesale Budget cuts of the kind that have been talked about, $5-$10-$15 billion. I can think of nothing more ruinous to the security of this country and our economy. And I think that those who advocate it were in many cases the architects of the fiscal and monetary policies which brought us into a recession in ’58, a $12.5 billion deficit in ’58, the largest outflow…of gold and dollars…and a recession in 1960. We hope to do better.
From the other side liberal Democrats complained that the reforms were inadequate, that wealthy individuals and corporations would benefit too much, that the timing was too slow or the amounts too low. Labor spokesmen preferred job-creating public works, fearful that business would use its tax cuts merely to increase automation. New Dealers, preferring public spending, called the President’s basic premise contrary to thirty years of Democratic philosophy.
Dillon and Hodges had analyses showing the benefits of the bill to business—cuts in the top brackets and in corporation taxes, combined with the tax gains given business the previous year—and Heller and Secretary of Labor Wirtz had tables to show labor and liberals that the lower-income groups had the largest proportionate cut. Both were right. But the President emphasized that the usual class warfare jargon was inappropriate, that his effort was not how to divide the economic pie but how to enlarge it for everyone. Helping business profits led to more jobs. Helping consumer income led to more sales.
The key to House approval was Ways and Means Chairman Mills. A long-time advocate of tax reform, he was doubtful about tax cuts when no recession threatened. Slowly the President brought him around. Initially Mills agreed to a major tax reform bill, with a little tax reduction to help pass it. When presented, it was a tax reform and tax reduction bill. In testimony, it became a tax reduction and tax reform bill. And when it was finally reported out by Mills, the President had his major tax cut bill with a little tax reform. More reforms, the President agreed, were overdue, but they could not even pass Mills’s committee.
Wilbur Mills, as he had proved the previous year on the trade, “little” tax and other bills, was an invaluable ally, respected by his colleagues, well-informed on his work and a cautious head-counter. No committee chairman had a firmer grip on his committee. Having been embarrassed by a defeat on the first bill he ever reported out as Ways and Means chairman back in 1958, the Arkansas Congressman never thereafter took a bill to the House floor without knowing he had the votes. He worked slowly, carefully, deliberately. The lengthy hearings and delays were at times exasperating to the President. “Do you realize,” he said to me one day, “that the British prepared, proposed, passed and put into effect a proportionately larger tax cut than ours, and are getting the benefits from it, while we are still holding hearings?”
Finally, as the House prepared to vote, the President went on television once again. This time the speech was worked and reworked, simplified and clarified. One draft was prepared by economics columnist Sylvia Porter, whose prose the President admired. Illustrations of how the bill would reduce the taxes of a typical family, and how their tax savings would be used to create more jobs, were inserted. So were the President’s favorite statistics: ten thousand new jobs had to be created every day; recessions have occurred on the average every forty-four months since World War I; seven million more young people will come into the labor market in the sixties than in the fifties. Some of his own familiar phrases were included: “We need a tax cut to keep this present drive from running out of gas”; “this nation is the keystone of the arch.”
This time the speech was a success, and so was the bill.
The Kennedy tax bill, as finally enacted with the help of his successor, and the unparalleled period of expansion both its anticipation a
nd enactment helped bring to the American economy,’ stand as monuments to the economic wisdom and political tenacity of John Kennedy. They embody a repudiation of the most persistent fiscal myths and fears which have so long dominated this nation. Prevented by the balance of payments and a conservative Congress from relying too heavily on the familiar Democratic remedies of still lower interest rates and still higher budgets, he had nevertheless broken the trend of postwar recessions by blazing new trails and rejecting old dogma. While it cannot be claimed that either the country or the Congress fully accepted his philosophy along with his bill, his actions shed more light on the once “dismal science” of economics than a generation of speeches and lectures.
In the process, John Kennedy’s own thinking had come a long way in a short time. In a message to Galbraith requesting information on a particular problem on the balance of payments, he asked for “as much technical detail as seems appropriate and without the limitations that you might feel in discussing the matter with one who is not a professional economist.” To this he added in a scrawl: “—but who knows a hell of a lot about it after taking Ec-A under Russ Nixon at Harvard.”