Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: Kennedy Was a Supply-Sider
[If you are a student at Supply-Side University, you received this earlier today. As it is especially relevant to the unfolding presidential campaign, I decided it would be worthwhile to post as a memo on the margin. JW]
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As much as I have admired Howard Dean’s tenacity in developing the arguments against the pre-emptive war in Iraq, which I had from the first believed was unnecessary, I have deplored his stance on taxation and public finance. I believe he built a wide lead over the rest of the Democratic field in Iowa and New Hampshire on the war issue, but blew it in both states with his promise to make a balanced budget his highest priority at home. He might have survived if he had made a case for reduced spending, but he promised to roll back the Bush tax cuts and then spend the revenue on domestic programs. Nor did he envision savings in military spending, saying where he would cut back here and there, he would also add here and there. None of it added up. In a Dean presidency, budget deficits of $500 billion a year would still loom as far as the eye can see and could easily grow if he actually persuaded Congress to put tax rates on capital gains back to 20% from 15% and to push back the tax on dividends to 38.6% from 15%. Dr. Dean does not understand that the stock market advance since last March, to a Dow Jones Industrial Average of 10,500 from 7,800 back then, has been chiefly inspired by these lowered tax rates on capital formation. Sad to say, but none of the other presidential contenders seem to realize this either.
This includes Senator John F. Kerry of Massachusetts, the frontrunner now that Dr. Dean has slipped. I’d thought that a Boston Democrat with the initials “JFK” would have figured out by now that he should be running as a John F. Kennedy Democrat, but instead he has been following the lead of Edward M. “Ted” Kennedy in promoting higher taxes on “the rich,” while not going quite as far as Howard Dean in making “Fiscal Responsibility” his domestic mantra. Older Americans may remember how the term “Fiscal Responsibility” was always identified with Republicans running for office, and that it always mean higher tax rates and bad times. It was actually another “JFK,” Rep. Jack French Kemp who in the late 1970's persuaded the GOP to “stop worshiping at the alter of a balanced budget” and become “John F. Kennedy Republicans.” I know, because I was there, explaining all this to Kemp when I first met him in early 1976. In a real sense, the Reagan Revolution did not begin with Reagan, or Kemp, but with President Kennedy’s 1962 proposal to get the country moving again by slashing the top rate on personal income to 65% from 91%. The fiscally responsible Republicans opposed the JFK tax plan and suffered their worst political defeat in a generation in 1964. I wrote about this in a memo to the current crop of presidential contenders back in June of 2002, but it obviously had no effect.
The biggest reason, I think, is that since Jack Kemp began promoting Kennedy-type tax cuts in 1976, the Democratic Establishment has been rewriting history to show that the JFK tax cuts were demand-side, Keynesian stimulants to the economy. This in fact has been Teddy Kennedy’s pitch all these years, but it is of course not the case. I first learned something of the background of the Kennedy tax cuts from the late Herbert Stein, when he was a member of Richard Nixon’s Council of Economic Advisors. I’d met Dr. Stein in 1969 when I was political columnist for the old National Observer and he gave me a copy of his book, “The Fiscal Revolution in America,” which I still keep close at hand for reference. The book makes it clear that Kennedy was familiar with the classical arguments of Andrew Mellon, who was Treasury Secretary to Presidents Harding, Coolidge and Hoover, which justified tax cuts where they were unnecessarily high because of their incentive effects on labor and capital. In proposing the tax cuts in late May of 1962, Kennedy cited the incentive effects, not the income effects that a Keynesian would argue. And when the legislation was introduced by Rep. Wilbur Mills of Arkansas, then chairman of the Democratic House Ways & Means Committee, his floor speech was all “supply-side,” actually written by the late Norman Ture, an economic consultant to Mills. Ture in 1981 was chosen as Undersecretary for Tax Policy in the Reagan administration, the one economist to bridge both JFK tax cuts, the second being Jack Kemp’s.
How that happened is moderately important, as it probably would not have taken that route but for the fact that I had been a liberal Democrat in my youth and had voted for JFK in 1960. I’d learned about the Mellon tax cuts in Herbert Stein’s book, but really began to understand the economics after meeting Arthur Laffer in early 1971 and his mentor, Robert Mundell, in May of 1974. It was Laffer who first taught me that there were always two tax rates that would produce the same revenue, based on the simple proposition of the law of diminishing returns as rates went higher and higher. It was Mundell who made me see that the inflation spurred when Nixon left the gold standard caused tax rates to climb not because of congressional action, but because of “bracket creep.” Labor and capital were being taxed at ever higher rates simply because inflation was pushing producers and investors into higher tax brackets, destroying incentives along the way. To this day, the income-tax rates have not been adequately adjusted to offset 30 years of inflation.
In November 1974 I wrote, “It’s Time to Cut Taxes,” an interview with Mundell in which he spelled out the need to return to a fixed gold/dollar exchange rate to end further inflation, and to adjust the tax rates downward to correct for the bracket creep. Kemp, a young congressman from Buffalo where he had been a star quarterback for the Bills before deciding to enter politics, read the article on the Wall Street Journal editorial page, where I was associate editor. With unemployment then at more than 15% in Buffalo, he grasped the tax cutting idea and had his staff come up with what was labeled “The Jobs Creation Act of 1975.” I recall someone on his staff sent me a copy of the bill, but it was poorly designed as a cluster of business tax cuts and I discarded it. It was not until a year later that Irving Kristol met Kemp at some Washington function and told me I should meet him. On a Tuesday in March of 1976 I happened to be in Washington, one of my meetings being with Eddie Mahe, the political director of the Republican National Committee, and we talked about taxes. Mahe also mentioned that I should meet Kemp and I thought of Kristol’s nudge in that direction.
My next meeting was across the street from the RNC in the House Cannon Office Building and as I walked down the corridor I noticed Kemp’s office. I decided to at least stop in and say hello, and when he heard I was waiting to see him, he burst out of his office, ushered me inside and displayed a stack of articles I had written that he had on his desk. I explained to him I’d not gotten in touch with him earlier because I did not take his “Jobs Creation Act” seriously, because it could never get through a Democratic Congress and really did not fix the bracket-creep problem because it did not address the income tax. This is when I suggested he think of the Kennedy tax cuts as a model. Paul Craig Roberts, who had recently joined Kemp as staff economist, didn’t have any problems shifting gears. He had inherited the Jobs Creation Act and saw the political merit of replicating the JFK tax cuts.
Once reconfigured, Kemp sold the idea to Senator Bill Roth of Delaware and the Kemp-Roth bill was born. I wrote a lead editorial for the WSJ, “JFK STRIKES AGAIN.” Craig Roberts left Kemp’s staff for the House Budget Committee, later joining the staff of freshman Sen. Orrin Hatch of Utah, where he devoted much of his time to promoting the tax cuts. Craig eventually served as deputy to Norman Ture in the Reagan Treasury. His replacement on Kemp’s staff was Bruce Bartlett, who kept the ball rolling as the idea caught fire. On September 30, 1977, the Republican National Committee officially endorsed Kemp-Roth. It was not until the summer of 1979 that former California Governor Ronald Reagan wholeheartedly rejected “fiscal responsibility” as the bumper sticker in his run for the GOP nomination and embraced Kemp-Roth as the central domestic plank in his platform. He was opposed by George Herbert Walker Bush, who labeled Kemp-Roth “Voodoo Economics,” and the rest is history.
Except that the Democratic Establishment to this day sticks to its guns that the JFK tax cuts of 1964 worked because they were Keynesian and the JFK tax cuts of the Reagan years were supply-side flops. Someone should explain to John F. Kerry that he might have better success running as a JFK Democrat, which could at this point involve cutting some tax rates while raising others. Just a thought.