Kennedy Administration Was an Early and Forceful Advocate for Dynamic Scoring

January 7, 2015

The new House-passed rule to require so-called dynamic scoring of substantive tax legislation has brought criticism from many quarters of Washington—lawmakers, pundits, and think tank types. Bloomberg quotes Representative Louise Slaughter of New York as saying that the new rule “cooks the books” in favor of Republican policies.

But accounting for the economic effects of tax policy is not new—economists have been modeling fiscal policy for decades—nor is it particularly a conservative or “Republican” idea. Indeed, the Kennedy administration was an early and forceful advocate of accounting for the dynamic effects of tax changes on the economy and on federal tax revenues.

Main Planks of the Kennedy Tax Cut Plan

President Kennedy unveiled his major tax cut plan on January 24, 1963 in an effort to jumpstart the economy and to “increase job and investment opportunities.” The tax plan was actually Kennedy’s second tax plan in two years; the previous year’s plan was aimed at stimulating new business investment by accelerating the depreciation schedules for capital expenses and enacting an investment tax credit.

The 1963 plan was even more ambitious. The main planks of the plan were[1]: (1) a substantial cut in individual tax rates (the top tax rate was to be reduced to from 91% to 65%); (2) a reduction in the corporate tax rate from 52% to 47%; and, (3) a revision in the treatment of capital gains. These cuts were to be offset by base broadening within the individual tax system and a shift in the timing of corporate tax collections.

Kennedy’s “Supply-Side” Case for Tax Cuts

According to Kennedy’s message to Congress outlining the plan, the package was intended to boost demand to augment the supply-side investment incentives enacted the year before.

“Despite the improvements resulting from last year’s depreciation reform and investment credit…our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment, and effort—thereby aborting our recoveries and shifting our national growth rate.” (p. 294)[2]

Whatever the demand-side motivations for the plan, both Kennedy and his Treasury Secretary Douglas Dillon used numerous supply-side arguments to sell the plan to Congress and it is clear that they employed some manner of what could be called “dynamic” scoring in the revenue and deficit projections.

Kennedy: Lower Tax Rates Deliver Higher Revenues

In his testimony before the Ways and Means Committee, Dillon told the members that the plan’s lower tax rates would not only boost GDP, but the higher economic growth would, in turn, boost federal tax revenues.

“We confidently expect that the lower rate structure we propose will soon yield more revenues from an enlarged economy than would be the case if we continue with our present repressive tax structure…In other words, paradoxical as it may seem, the desired goal of a balanced budget can be reached more rapidly with tax reduction and reform than with our present tax system.” (p. 311)

Indeed, Dillon was echoing his boss’s own predictions to Congress. Kennedy’s message predicted that: “Within a few years of the enactment of this program, Federal revenues will be larger than if present tax rates continue to prevail…As the economy climbs toward full employment, a substantial part of the increased tax revenue thereby generated will be applied toward a reduction in the Federal deficit.” (p. 296)

Not only would the tax cut plan boost Washington’s finances, said Kennedy, but it would also provide a boost to the coffers of state and local governments.

“State and local governments, hard pressed by a considerably faster rise in expenditures and indebtedness than that experienced at the Federal level, will also gain additional revenues without increasing their own tax rates as national income and production expand.” (p. 295)

The Gains to the Economy Were Worth The Losses to the Treasury

However, Dillon explained that the revenue payoff would not be immediate, but would occur once the economy gathered steam.

“While a temporary revenue loss will be incurred at the outset, the stimulating effects of tax reduction and reform on the economy will give rise to subsequent revenue gains, and in the longer run the revenue producing powers of our tax structure will be raised substantially.” (p. 332)

Kennedy went on to say that the gains to economy would be worth whatever losses were incurred by the U.S. Treasury:

“Total output and economic growth will be stepped up by an amount several times as great as the tax cut itself. Total incomes will rise—billions of dollars more will be earned each year in profits and wages. Investment and productivity improvements will be spurred by more intensive use of our present productive potential; and the added incentives to risk taking will speed the modernization of American industry.” (p. 294)

“Feedback” From Higher Growth Reduces Effect on the Deficit

Kennedy made it very clear that once the ‘‘’feed back’ in revenues from [the plan’s] economic stimulus” was accounted for, the tax plan would add less to the deficit than would otherwise be expected.

Like today, Kennedy’s team faced many doubters who thought that the prospects of higher revenues due to economic growth were too good to be true. Indeed, even Tax Foundation economists worried that “much reliance is placed on increases in revenue due to growth in the economy as a result of these tax changes.”[3]

In his testimony before Congress, Dillon responded to these concerns directly with the empirical evidence they had at the time:

“That this conclusion is not merely wishful thinking is clearly demonstrated by what happened following our last major peacetime tax reduction. Under the 1954 tax program taxes were reduced by $7.4 billion. Budget receipts of $64.4 billion in fiscal year 1954 dropped to $60.2 billion in fiscal 1955, but by fiscal year 1956 budget receipts had attained a level of $67.9 billion, $3.5 billion more than had been realized in the year prior to the tax reduction.” (p. 311)

Conclusion

Dynamic scoring or dynamic analysis is not a new technology invented by today’s Republicans to ram through tax cuts that some worry will “bust the budget.” Economists have been estimating the effects of tax changes on the economy for decades and were certainly using these techniques to support the Kennedy administration’s pro-growth tax cuts.

Today, we have better technology and empirical evidence than what guided Kennedy’s economists, and members of Congress deserve to have the benefit of these advances.



[1] Annual Report of the Secretary of the Treasury on the State of the Finances, For the Fiscal Year Ended June 30, 1963. Exhibit 18—Message from the President, January 24, 1963, relative to a revision of our tax structure. p. 294.

[2] All the following page references refer to the Annual Report of the Secretary of the Treasury 1963.

[3]Tax Reduction and Reform: A Summary of President Kennedy’s Tax Proposals,” Tax Foundation Special Report, February 11, 1963, p. 2.

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