Home > The Economy > Quote of the week: John F. Kennedy, Nov. 20, 1962

Quote of the week: John F. Kennedy, Nov. 20, 1962

September 14, 2012 Leave a comment Go to comments

from  quiglag

“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.”

– John F. Kennedy, Nov. 20, 1962

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  1. Jerry Wyant
    September 14, 2012 at 2:40 pm | #1
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    The problem with this quote is that people not only take it out of context, but they assume the same thing will be true regardless of the context. That is how we got the deficits from the Bush tax cuts, using this same reasoning for every type of situation.

    The context of this quote is that the top marginal tax rates at the time were 91% in the U.S., and even higher in some other countries. Those kind of rates do indeed stifle the economy. Eventually, they were lowered to 77%. But now, they are at 35%, with more loopholes for those at the very top. Most economic studies that I have seen put the optimal rate, in terms of deficit reduction and job creation, at anywhere from 65% to 75%. Which means that when Kennedy spoke these words, the context was completely different from when Bush lowered the rates to 35% from 39.6%, or now, when some want to use the same reasoning to lower them from the current 35%.

    The historical record between Kennedy’s words and now prove that lowering rates too much will create massive deficits but won’t create jobs to pay for them.

  2. Paul Schächterle
    September 14, 2012 at 4:38 pm | #2
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    I don’t think that top tier tax rates >90% generally stifle the economy. It is just that in a “free trade” environment you get regulatory competition incl. tax competition and tax evasion. And in the 1950s and 1960s many trade barriers were lowered.

    • Jerry Wyant
      September 14, 2012 at 5:09 pm | #3
      Reply | Quote

      I should have worded that differently, and said something different from the phrase “stifle the economy”. By saying that, I was mixing up two different points, one macro results and one marginal results. I have no proof that high marginal rates stifle the U.S. economy on a macro level. In fact, the overall performance and growth of the economy were better with the higher rates. And I would argue, created a rosier future. When I said stifle, I was thinking marginally. I based that on the combination of two things: The various studies that I have read over the years that I mentioned (but without taking time to do some research, I can’t cite because I didn’t document them), and the fact that this post had the concept of a Phillips Curve behind it (it didn’t actually mention it, but it was about the same concepts – growth and tax revenue).

      So to rephrase, I would say, and I have written about this often in the past, that the overall economy doesn’t suffer because of high tax rates at the top. But based on studies, I would suggest that once the rate reaches a certain point (the peak of the Phillips Curve, if you happen to believe it has one), there is nothing to be gained in the context of growth and revenue from raising rates any more. That is the part that I meant by “stifle”, just the marginal difference at the top. I don’t have any evidence other than known cases of “brain drain”, which does occur at some level when rates are high.

      Right now, we are a long ways away from having a tax code that is ‘stifling’. We have a tax code that creates large deficits, increasing income and wealth gaps, and a shrinking middle class that provides demand and much more for the economy.

      As for job creation etc., different rates do create different incentives. Low rates do not give incentives for job creation because they change the opportunity cost in a direction away from an incentive to hire. High rates give companies an incentive to hire, since they can write off employee expenses. But high rates also give companies an incentive to move overseas, to shut down, or to not even start up in the first place. If you take any given company, and assume that it will be an on-going domestic concern regardless of its marginal tax rate, then higher taxes will not stifle job creation. If you take away those assumptions, then there are offsets, and it depends on the other opportunities that are available. That’s why I support tax incentives to keep American businesses at home. It could be done with relative ease if not for political opposition. I have published an outline of my own version of such a policy.

      I’m not trying to mix personal taxes with business taxes; I am using generic tax rates and relating them to jobs, whether personal or corporate, on purpose, because that’s how so many people understand the relationship between taxes and jobs (rich people are ‘job creators’, or so we keep hearing). I could do an analysis that separates different kinds of taxes, but that would just increase the length of such an analysis.

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