On January 24, 1963, President Kennedy gave a special message to Congress, which included his proposals designed to continue to move the U.S. economy out of a recession that had started in early 1961. He proposed slashing the individual and corporate tax rates, which ultimately brought down the top marginal rate from 91% to 70%. He also reduced the top corporate rate from 52% to 48%. Despite political winds indicating that there wasn’t great support for his idea and that maybe it should be done on a temporary basis, he worked for this significant rate reduction on a permanent basis. Some (not all) of his proposals were eventually reflected in the Revenue Act of 1964.
The Heritage Foundation notes that as a result of lowering marginal rates, “tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62% (33% after adjusting for inflation). A quote from Kennedy’s message 50 years ago:
“Our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficits temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget.”
Another plank in his plan for tax reform was the expansion of the investment tax credit to encourage businesses to invest in certain capital acquisitions. Kennedy reasoned that the cost of the tax credit would be offset by the growth in businesses, which in turn, would lead to more tax collections on increased profits.
The first investment tax credit was enacted in 1962 in response to his call for such an incentive to make U.S. companies more competitive worldwide. The credit was 7% of the cost of qualified property (essentially equipment and machinery). Once the property was no longer “qualified” (i.e., it was disposed of before the end of its useful life), the credit was recaptured (a portion was taken back into income in the year of disposition, depending on how long the property had been used).
But the credit as first enacted was a far cry from what Kennedy had wanted. The credit was dramatically liberalized in the Revenue Act of 1964 (the same law that cut the tax rates and made some other significant tax changes) by ending the rule that had required the basis of property subject to the credit to be reduced by the amount of the credit. By ending this basis reduction, depreciation could be taken on the full cost of the qualified property.
On a personal note, I recall very well Kennedy’s addresses to the nation and his explanation to the public of the investment tax credit. My dad owned a tool and die company in the Bronx (NYC), and he (a life-long Republican) was very enthusiastic about the proposal. My dad’s company was in a position to utilize the investment tax credit and benefit from it.
Ok, so we’ve had our tax moment for the time being, with enactment of the American Taxpayer Relief Act at the start of this year, making permanent many of the Bush-era tax cuts. However, listening to some members of Congress, I don’t think they get what Kennedy was driving at: that lower rates and select tax incentives appear to lower revenues but ultimately will drive the economy, leading to greater revenues. With Congress poised to take up major tax reform (something not done since 1986), I hope that the words from 50 years ago are remembered!