The period beginning shortly after World War II’s end in 1945 through 1973 is generally regarded as the apex of American prosperity. This is the impression given by the classical data, in particular the economic-growth time series of the Bureau of Economic Analysis, Gross Domestic Product. From the trough in GDP in 1947 through the peak of 1973, economic growth per annum was 4.03 percent per year. This rate exceeded all subsequent trough-to-peak periods of at least ten years in length. The closest is 1982–2000, whose per annum growth rate was 3.73 percent. The trough of 1982 was, however, in real-economy terms, considerably lower than that of 1947. In 1982, the ex-government economy had shrunken by 6.3 percent over the previous three years; in 1947, the real economy had expanded by 39 percent over the previous two years. Thus the base of private economic activity was comparatively higher in 1947 than in 1982, even as the aggregate growth rate over the two multidecade periods that ensued was greater in the former case. In the contemporary era, 1947–73 was clearly the dominant run of GDP growth.^{Footnote 1}

Further canonical data establish the incomparable nature of the economic performance of the postwar era. Median family income increased in inflation-adjusted terms by 104 percent from 1947 to 1973, easily setting a standard. The only other notable run in the statistic was when it grew by 25 percent from 1983 to 1999. The national unemployment rate averaged slightly under 5 percent from the beginning of that measurement in 1948 through 1973, while inflation over that quarter century was often near or less than 2 percent per year, currently the Federal Reserve’s benchmark of price stability. Jason Furman, President Barack Obama’s chair of the Council of Economic Advisers, reflected a common view in the fall of 2013, when he spoke repeatedly in prepared remarks of “that golden age from 1948 to 1973.”^{Footnote 2}

Yet the GDP time series also reveals segmentation in the 1945–73 period. Growth was strong, then moderate if not slow, then strong, then moderate. In the first subperiod, from the trough of 1947 through the peak of 1953, GDP averaged a 5.3 percent increase per year. Over the eight years of the Dwight D. Eisenhower presidency, 1953–60 inclusive, growth was less than half as much, 2.5 percent per annum. From 1961 to 1969, growth was double that of the previous subperiod, at 5 percent per annum. It gave way to a 3.6 percent rate to the 1973 peak. (The segmentation is slightly milder over the first two subperiods concerning ex-government growth, which was 3.6 percent per annum from 1947 to 1953 and 2.5 percent from 1953 to 1961. From 1961 to 1973, the public and private sectors followed a similar growth path.)

As for the frequency of recessions, from 1949 to 1960, four occurred, with average amount of time spent in recession, from the 1948 peak to the 1961 trough, 27 percent. Over the 106–month span of February 1961 to December 1969, no recessions occurred, the longest such period up to that time in the record keeping of the National Bureau of Economic Research. As for the severity of the 1950s-era recessions, that of 1957–58 contained the worst two-quarterly drop in GDP in the entire time series, inclusive of the latter-day Great Recession. GDP fell at an annual rate of 7 percent over the half-year beginning in October 1957, edging out the 6.8 percent annual-rate fall in the half-year beginning in October 2008. Furthermore, the growth of the 1961–69 subperiod was consistently high. From the last three quarters of 1961 (the exit of the trough of the 1960–61 recession) through first quarter of 1969, per annum growth was below 4.4 percent in one year, 1967. That year’s growth of 2.7 percent was above the average growth of the Eisenhower years.^{Footnote 3}

“Postwar prosperity” (a term probably coined, in journalism, in the late 1940s) did not take on its essential expansive nature until the 1960s. Had the Eisenhower-era growth-rate trend held, or improved only moderately, the post-1945 epoch would have never gained its “golden” characteristics. Growth would have averaged less than 3 percent, with recessions common for the full generation after 1945. The 1960s made postwar prosperity a dazzling fact. The 1950s had sustained the possibility but struggled with realizing the result.

It is not only the ex-post-facto GDP time series and the other major macroeconomic statistics that conduce to such impressions. During and after the exceptionally sharp, if brief, 1957–58 recession, the matter of increasing the current rate of economic growth became the crux of a national conversation. The Rockefeller Brothers Fund study of 1958, dubbed by the press the Rockefeller Report, was the first major entry. It called for a rise in the current long-term economic-growth rate by two points, to 5 percent, in the interest of increasing employment and funding public services. In 1960, both the Democratic Party platform and a major statement of Republican leaders, Vice President Richard M. Nixon’s and New York Governor Nelson Rockefeller’s “Treaty of Fifth Avenue,” endorsed the target of sustained 5 percent economic growth, the platform noting that this would be “almost twice as fast as our average annual rate since 1953.” Michael Harrington, in The Other America: Poverty in the United States (1962), a book that the author had begun during the 1957–58 recession, argued that a substantial increase in the rate of economic growth was required to solve the problem of the nation’s 50 million poor (his estimate). Enhanced growth would directly solve half the problem in the form of new jobs, in Harrington’s view, while the funding for human services programs to ameliorate the other half would be made available under the conditions of such growth.^{Footnote 4}

Narrative evidence corroborates what arises from the data: economic growth in the greater part of the 1950s, and the beginning of the 1960s, was not high. These years were demonstrably not “golden”; not a locus of a surpassing run in American economic history; and not constitutive of the central reality of postwar prosperity, namely a major, sustained, broad-based economic expansion. This phenomenon came in its fullness, rather, in the 1960s. Had the aspirations of the late 1950s—the doubling of the growth rate—not been achieved in the 1960s, postwar prosperity would have played out as a dead-letter.

The 1950s, nonetheless, have had a hold on the American imagination (dating to the 1950s nostalgia that broke out during the stagflation experience of the 1970s) as one of the greatest of economic decades. Scholarship has explored the matter of economic mediocrity in the 1950s, if not enough to shake the common perception of the ’50s as an economic golden age. History and economics have also stressed the existence of a great boom in the 1960s, often in the context of discussions of the “new economics” of the President John F. Kennedy advisory team. The persistently drab economic conditions, the “secular stagnation” of the twentieth-first century give new grounds for addressing a question perhaps considered settled: What role did policy play in the establishment of the essential period of postwar prosperity, namely the eight-and-three-quarter-year expansion at a maximal rate beginning in 1961?^{Footnote 5}

The most significant economic policy proposal at the GDP inflection point in the early 1960s was the tax-reform bill (the major attribute of which was a large and nonexpiring cut in all rates of the income tax) that the Kennedy administration began preparing in April 1961, submitted to the House of Representatives in January 1963, and passed into law (on President Lyndon B. Johnson’s signature) in somewhat altered form in February 1964. The civil rights and the tax-reform proposals of 1963 were the only ones generally referred to in the Kennedy years as the administration’s “big bills.”

As for other economic policies of the Kennedy years, the only one of magnitude was the simple aggregate level of domestic government spending. Federal nondefense spending grew at a healthy real rate from 1961 to 1965, by 34 percent, as defense grew by only 8.6 percent, compared to an increase in GDP of 20 percent. Compositionally, the major increases came in two areas (accounting for half the growth in federal spending in these years), Social Security, and space and science. Growth in Social Security spending was no innovation in the Kennedy years: the 1961–65 expansion in these outlays (of a third, to 15 percent of the budget) was notably less than the 76 percent of the previous four years. Space and science had its outlays increased by fivefold from 1961 to 1965. In 1965, this portion accounted for 5 percent of the federal budget and three-quarters of a percent of GDP. There was no regulatory program of note introduced in the early 1960s, and the monetary system evinced no major new paths.^{Footnote 6}

In terms of policy pertaining to the economy, the “tax cut,” as JFK habitually referred to his bill, was what changed in the early 1960s. What is also clear is that statistics, as corroborated by narrative evidence, indicate a major phase change in the growth trends of the post–World War II years at the time that this policy emerged. While it cannot be certain that the new growth trend corresponded to the emergence of the tax cut in a propter hoc fashion, it is possible.

The history of the Kennedy tax cut of 1964 stretches back into the 1950s as a matter of evidence: the general tax reform program set forth and explained in the immense Tax Revision Compendium compiled by the House Ways and Means committee in 1959 bore substantial similarity to the proposal that Kennedy put before that same committee in January 1963. Indeed, the identical individuals guided both entities into being. Harvard Law School professor Stanley S. Surrey supervised the compilation of the Compendium, at the behest of committee chair Rep. Wilbur D. Mills of Arkansas. Surrey led the composition of the Kennedy tax bill as assistant secretary of the Treasury for tax policy beginning in April 1961, and Mills guided the bill in Congress.

The following pages are an investigation into the tax-cut and reform rationales put forth in the Compendium of 1959, with comment as to their correspondence to the considerations of the Kennedy tax cut in 1962–63, these matters set in the context of the general national discussion regarding economic growth prevailing at the time. A theme that emerges is the high degree to which the given income-tax code was “captured”—in the sense of regulatory capture—by those who wished to take advantages of its exemptions, its loopholes, or “tax expenditures” as Surrey coined the latter term in 1967. The solution was in minor part to eliminate such tax expenditures by writing them out of the law. But in the main, the expectation was that lower tax rates, especially on higher income, would so devalue exemptions that the capital of the affluent would flow more naturally to economically productive purposes—out of tax shelters and into enterprises that could fill a market.

As for the theme of this issue of this journal, it was the Pareto-like capturing of the tax system by the well-connected that, in the tenor of these debates, was largely responsible for the economic-growth problems of the mid-to-late 1950s and early 1960s. A major cut in the progressive income-tax schedule, in particular the very top rate, emerged as the preferred method to see to it that freedom to make economic decisions, over and above the guidance of the tax code, drove resource-allocation such that a greater prosperity than that sustained a decade and a half after the war might be achieved.

The Tax Revision Compendium of 1959 was a collection of 183 essays written by the various experts invited to testify before Ways and Means that November and December on the matter of tax revision and “broadening the tax base,” as the subtitle of the Compendium had it. The volume came out at the conclusion of a heady year of economic growth: GDP went up in 1959 in real terms by 6.9 percent. This followed the 0.7 percent drop of 1958 and the middling 2.1 percent rates of 1956 and 1957 (per capita GDP growth was negative in the United States from 1955 from 1958). Committee chair Mills reminded his auditors, as the hearings convened, that the first criterion he had put forth in calling for the papers several months before was that “tax reform must seek … a tax climate more favorable to economic growth.”^{Footnote 7}

The introductory essay by Surrey was, by the author’s acknowledgment, a digest of a paper he had recently published in the Columbia Law Review. Since the comprehensive Internal Revenue recodification of 1954, Surrey had been putting out a series of scholarly articles on the opportunities that kept getting missed in terms of making the tax code more efficient. His Compendium paper laid out the ironies that he had been repeating for the better part of a decade.^{Footnote 8}

“The income tax provisions of the Internal Revenue Code begin with sweep and power,” Surrey wrote to start his essay and the Compendium. “The very first section of the code goes straight to the rates of tax and prescribes a rate schedule that is severe and steep—starting at 20 percent with low exemptions, rising to 50 percent at $16,000, on to 75 percent … , and finally to 91 percent at $200,000. The code then proceeds to a definition of ‘gross income’ … that is as broad as any to be found: ‘all income from whatever source derived.’”

Yet much of this in the income-tax code, that which was “severe and steep” and characterized by “sweep and power,” was an illusion, a list of “paper rates.” The “tax law in its initial sections,” Surrey continued in his Compendium essay, “presents the picture of an income tax of extremely wide sweep applied at most severe rates, especially in the upper brackets,” but this “picture” was only “initial.”

Surrey adduced an example of an earner making at least $100,000 per year and subject to a theoretical minimum effective tax rate of 67.3 percent (the effective rate, in this case, being the average rate such an earner would pay if all income, after the standard deduction and personal exemption, were subjected to the given schedule of income-tax rates). Internal Revenue statistics from 1956 revealed that in aggregate, such earners paid an effective rate of at most 53 percent. By certain conventional means of assessing income, they paid a rate of 36 percent. Surrey pointed out that his estimates were conservative, in that his sample began with earners making $100,000 and included all those above that level, including earners of more than $500,000 whose effective rate theoretically rose to 87 percent. “These are startling figures,” Surrey wrote, given that the “table has rates in the 70-, 80-, and 90-percent brackets…. It is thus obvious that the power and sweep of the initial sections are not matched by the end result.”

The figures were “startling” as a figure of speech, because they were laid out in contrast to the table of rates. No one was in fact startled. That the soaring rates on high earners were easily slipped through legal tax avoidance was commonly understood in the 1950s, as contributors to the Compendium mentioned on a number of occasions. Surrey went over, in his essay, the typical means of such avoidance. Executive compensation could be deferred, or classified as capital-gains income and be both largely not reported and subject to a lower rate (an effective maximum of 25 percent). State and local bond interest was untaxed and went unreported. Natural-resource royalties were subject to exclusions that totaled $700 million. Cash-value life insurance kept $1 billion in interest accruals from taxation every year, and the final benefit was tax-free (such insurance bore features similar to those of Roth retirement accounts today).

Surrey observed that generally, these exclusions had come to the code inadvertently. For example, Congress had made state and local government bond interest tax-free so as to avoid a Constitutional challenge to the first income-tax law. Yet once exceptions to reporting requirements and rate schedules were put in statute, they became difficult to dislodge on account of being “enmeshed in lobbying pressures.”

Surrey’s scholarly publications in recent years had specialized in bringing illustrative cases in this regard to light. In a Harvard Law Review article of 1957, reflecting on the passage of the recent Internal Revenue codification (codification making it administratively easier for the tax code to accept further complication), Surrey explained a particularly juicy case, the “Louis B. Mayer amendment.” This was a special line that the Hollywood mogul, just prior to his retirement in 1951, had successfully lobbied Congress to write into the tax law. It was couched in such a way as to apply only to Mayer and his associate in the context of the windfall they stood to gain on separation from their movie studio. The line ensured that the effective rate on Mayer’s one-time lump-sum gain of $2.8 million, which under current law would have been subject to the 91 percent rate, went down by 66 points, to 25 percent. Surrey was Harvard’s top tax-law expert, and the HLR in the 1950s displayed stories of such doings repeatedly. A 1955 article by Northwestern professor William L. Cary (whom Kennedy would name to his father’s former post as head of the Securities and Exchange Commission) began with a quotation from a top Washington lawyer. This attorney’s advice to affluent clients was not to litigate a tax case but to get the relevant statute changed—it was that easy for the well-connected to get a pet exclusion put into the code so as to avoid the high rates with all their apparent “sweep and power.” In his Compendium essay, Surrey questioned “whether an income tax can successfully cope [with] an extremely skilled tax bar … and a tax-conscious clientele.”^{Footnote 9}

Surrey’s solution in his Compendium essay was to eliminate exclusions as much as possible while lowering the top rate from 91 percent to “70 percent or 65 percent.” There should be a trade-off, fewer exemptions in exchange for lower rates—a classical tax reform that, Surrey specified, “would not involve a revenue loss.” Surrey had, in print, suggested 60 or 65 percent as a top rate three years before, and figures in this range may have been part of congressional discussions of the bill that became the codification of 1954 (which did not disturb the top rate). In the sentence in his Compendium essay in which he suggested the 65–70 percent top rate, Surrey referred to the Rockefeller Brothers Fund report of 1958 that had identified tax reform featuring a major cut in tax rates as one of the means of increasing the national growth trend by at least two points per year through the 1960s.

Further papers in the Compendium followed similar lines of reasoning and drew from the same big lode of tax-avoidance evidence. Examples flowed in the paper of the AFL-CIO’s contributor Peter Henle. Henle brought up the salaried executive’s “expense account, or ‘swindle sheet,’” whose “abuses … are well known.” He cited a recent study in the Yale Law Review that put expense-account tax exclusions at $5 billion annually, representing a percentage point of GDP. Henle considered the matter of executive compensation, discussing the remarkable case of the leaders of the Aluminum Company of America. From 1952 to 1958, nearly $100 million in compensation of Alcoa executives was arranged to be subject to no more than the 25 percent rate. The company was able to have its board chairman, I. W. Wilson, take home $2.6 million on only $4 million in income over the six years by arranging things in a tax-preferred fashion. If Wilson had been paid an ordinary salary, it would have taken Alcoa $3.7 million in salary per year from 1952 to 1958 to see to it that Wilson netted a total of $2.6 million. “It is clear,” the AFL-CIO researcher concluded, that “these high rates”—“as high as 91 percent in a progressive tax schedule”—“have been a major factor working to open new loopholes and to widen existing ones…. It would therefore be sensible and realistic to consider reductions in the upper income tax rates.” Henle proposed a tax reform similar to Surrey’s.^{Footnote 10}

The 183 papers in the Compendium filled just about 2,400 pages, each author taking up a set of details in the code that appeared to be distorting the tax system in the direction of inefficiency or inequity. The heft of the volume reflected the complexity of the code. As Surrey had noted, only the opening pages of the tax code were dedicated to the publication of the standard progressive rate schedule. The thousands of other pages that followed, in the ever-growing Income Tax Code of 1954, represented enumerations of exemptions from these opening rates.

The question of why such a system should be reformed is one that Mills had raised when he called for the papers of the Compendium. Mills listed a number of reasons—ease of administration, fairness—but his first one was the promotion of economic growth. Essays in the Compendium were nearly of one accord that a tax reform switching out loopholes for a reduction in especially the highest tax rates would have the direct effect of a higher pace of national economic growth.

Yale law school’s Geoffrey J. Lanning contended with one of the persistent justifications for tax complexity in the 1950s: complexity itself enhanced the prospects for economic growth. “There are those,” Lanning wrote in his Compendium contribution, “who seek to justify the present pattern of erosion by tying it to our economic goals of stability, growth, and prosperity.” (“Erosion” was a technical term referring to the separation of effective and statutory tax rates on account of exclusions.) “It is argued that only a system of special preferences will provide the needed economic incentives…. This preferential approach provides an indirect allocation of resources … to the small group of taxpayers who, it is assumed, will so invest them as to provide the necessary capital formation.” Lanning challenged this view, espoused as it was by industry associations and a convenience of lobbyists. “A structure of special privileges is inconsistent with either ‘fairness’ or ‘equity’ or with the other assumptions behind a democratic form of society.” Lanning rejected the argument that “we must choose between [an] expanding economy, and the abolition of these tax preferences.” His own position derived from “a fundamental truth … : The democratic way … is not only the most just, but … the most efficient.”^{Footnote 11}

As for a plan, Lanning did not, like other Compendium authors, call outright for a tax reform of reducing the 91 percent top rate to “a more gentle 60 to 65 percent” while striving “to close loopholes in the laws.” He conceded that if “these ‘loopholes’ were closed, the total amount of income subject to tax would presumably be larger … , and so tax rates could be lowered and still produce the same revenues.” Lanning did not prefer this option because he found it to address only symptoms. What had to change was the culture of taxation—the readiness of business to make questionable arguments about “incentives” in pressuring for cushy carve-outs in the tax code, the propensity of the electorate to concede that the high tax rates of the day justified special relief for high-earners, the lack of “self-criticism” on the part of Congress as it indulged the process. Until that culture changed—and the route to such change was not obvious—the nation would suffer from substandard economic growth under the burden of an undemocratic tax system.

Any number of the hundred some authors in the Compendium endorsed explicitly or in principle the lowering of the top rates of the income tax in the interest of economic growth and democratic principles. Former FDR tax official Roswell Magill wrote that to “the extent that a revision of the tax structure can promote the objective of rapid economic growth, it should be given a high priority. This means again a reduction in the highest marginal rates of the income tax which are the points at which the tax impinges most upon incentives for risk taking and upon funds available for investment.” Magill was one of several authors to note that the current tax structure rewarded existing large concerns (who could hire seasoned tax professionals and lobbyists) and “discourages … venturesome investment,” a term used later in the Compendium by a representative of a big-business advocacy group, John C. Davidson of the National Association of Manufacturers. Davidson observed as well that “in the 5 years ending in 1957, the growth rate averaged less than 3 percent a year, or no more than three-fourths of the historic rate…. This is clearly inadequate…. There is no reason why we should be limited to the growth of a previous era, if punitive tax rates did not choke off the source of extra growth.” William Fellner of Yale wrote that “totalitarian countries find it relatively easy to promote economic growth because they can force subjects to save.” Fellner continued: “Free societies do not resort to these methods outside a limited range of activities,” as he dismissed the economic efficacy of the “punitive” rates (which for him appeared to be those over the top corporate rate of 52 percent) high in the code.^{Footnote 12}

One Compendium author who was cool to tax-rate reduction was the University of Minnesota’s Walter W. Heller, who in fifteen months’ time would begin his tenure as chair of the Kennedy Council of Economic Advisors. A central point in his essay was the imperative to retain the current progressive structure. Heller expressed concern that a rate cut could “moderate” the “anticyclical” nature of fiscal policy (whereby tax collections went differentially up in economic expansions and down in recessions) and preferred to balance loophole-closing with direct expenditures, when loopholes served justifiable purposes. At the end of his essay, Heller spoke of “cutting off the unrealistic ‘paper’ brackets above 70 percent,” more in the way of referring to a common plan as opposed to offering his own recommendation. Across the Compendium, with exceptions including AFL-CIO research director Everett Kassalow, Heller was one of the few who did not concede the top rates of the income tax as unjustifiable on equity, efficiency, and growth grounds as a matter of course.^{Footnote 13}

Another recession year was 1960. The National Bureau of Economic Research today counts a ten-month recession beginning that April and lasting through February 1961, the first full month of the Kennedy presidency. The frequency of recessions, and the slow postwar growth rate (made smaller by the developing economic trough), came on as a major theme in the presidential campaign of 1960. The presumptive Republican Party nominee, Richard Nixon (the incumbent vice president), initially refrained from conceding the point of the low economic growth status quo. Only with the Treaty of Fifth Avenue—Rockefeller’s vehicle for saying that he would not make a bid for the nomination—did Nixon make the encouragement of economic growth part of his agenda. Kennedy, for his part, picked up on his party’s platform’s ridiculing of the Eisenhower-era growth rate and made “get this country moving again” his most recognizable campaign slogan. Nixon and Kennedy were both short on specifics as to their preferred policies for enhancing growth once in office, in particular regarding tax reform involving a reduction in tax rates.

The Kennedy victory that November brought two Compendium authors into government service, Surrey as Treasury Secretary C. Douglas Dillon’s assistant for tax policy, and Heller as CEA chair. Surrey also directed a 1960 task force on tax reform for Kennedy. In this document, Surrey called for a comprehensive tax reform and used the term “paper rates” as he had in the Compendium in reference to the upper brackets of the income-tax schedule.^{Footnote 14}

The Heller CEA, consisting as well of economists Kermit Gordon and James Tobin, endorsed the objective of economic growth wholeheartedly. However, the method was not to be a tax reform of the Surrey variety. The CEA preferred to boost growth through human-capital-enhancing initiatives on the spending side, ranging from education to science and health programs. The Kennedy economic policy was, effectively, the serial implementation of the two options that the president’s two sets of economic advisers advocated. From 1961 through the first half of 1962, the CEA was in ascendance. Federal nondefense spending went up in real terms by 21 percent from 1960 to mid-1962 (we do not have disaggregated fiscal 1961, ending June 30, 1961, budget statistics), or two-and-a-half times the rate of economic growth. Contributions to this increase came from big moves in Social Security and space and science, as well as from the dozens of public-works and human-capital projects that Kennedy signed into law over his first eighteen months, prompting Theodore H. White to marvel at “how much new legislation was actually approved and passed into law under Kennedy—more than at any other time since the 1930s.”^{Footnote 15}

The reports of the Heller CEA in 1961 and 1962 emphasized obtaining growth by means of judicious government spending; shedding concern for any budget deficit that might arise from such growth-stimulating spending in an economy exhibiting productive slack; and reserving tax cuts of a small (maximum of 4 percentage points on the income-tax side), targeted, temporary, and presidentially revocable nature for staving off a recession. There is scarcely a word in these reports in favor of big and permanent across-the-board tax-rate reductions, especially at the top echelons of the income-tax schedule, even if counterbalanced by exemption-curtailment. There are, rather, notes of concern about such a prospect. The January 1962 report, for example, had it that “changes in the basic structure and level of taxation should be made by Congress with full deliberation in the light of many relevant considerations, including the long-run revenue needs of the Government.” This echoed a Paul Samuelson report of the previous January—Samuelson being “constantly consulted” by the Kennedy CEA, as Tobin would later recall—which held that major cuts in tax rates could prove “tragic,” given the “new public programs coming up in the years ahead.” As Heller had already pointed out in the Compendium, a comprehensive reduction in income-tax rates would also lessen the ability of the tax code to act in an economically countercyclical fashion.^{Footnote 16}

It remains unclear why a mythology about the Kennedy tax cut has arisen over the years—namely, that it was the brainchild of his CEA team—given two realities: these advisers were the ones who would rather not have pursued that policy option; and those who did advocate and develop that option are readily identifiable, namely the tax circle at Treasury. Tax has long been the province of Treasury, not CEA, and Surrey’s task under Dillon in 1961 and 1962 was to develop a reform/rate-reduction bill along the lines that Surrey had been discussing roundly in recent years and that had hope of getting through the special-interest gauntlet. When recession forecasts emerged in the summer of 1962, Kennedy specifically denied Heller’s request for a temporary tax cut in favor of a full implementation of the Treasury proposal.^{Footnote 17}

In his public addresses in support of the Treasury tax plan, Kennedy called on arguments that were similar to the major notes of the Compendium of several years before. Quotations from his August 1962 television address and his Economic Club of New York speech the following December include:

Kennedy introduced his bill to Ways and Means, still chaired by Mills, in January 1963, offering a cut in all rates of the income tax by about 20 percent apiece, with larger cuts in the top and bottom rates, the bottom rate slated to go from 20 to 14 percent and the top from 91 to 65 percent (30 percent and 29 percent reductions, respectively). Included were a roster of loophole-closings, the biggest a limit on itemized deductions. Others were life-insurance, estate, and capital-gains reforms. The thrust of the Compendium had its realization in pending legislation.

Dillon carried to the House arguments similar to those Surrey had been making for years. He said to the committee: “The primary objective is to release the economy from the shackles of an overly repressive income tax rate structure so that it can … avoid the recurring recessions that have characterized the postwar years…. Removing the restraints imposed by our repressive tax rate structure … will restore incentives for risk taking, initiative, and extra effort—incentives that have been held in check in recent years.” Here Dillon was reclaiming the connotation of the term “incentives,” corrupted as it had been in recent years by those arguing for exceptions to the high rate structure. As for the loopholes, Dillon called them “defects” that “are byproducts of our excessively high rates and can and should be remedied only in conjunction with a general reduction in rates such as is being proposed.” He cited “a broad measure of agreement” that a big cut in income-tax rates “is what is required to release energy and efforts and to avoid the area of diminishing returns and excessive concern with the tax consequences of business and personal decisions.”^{Footnote 19}

Kennedy’s tax bill did not get out of committee that spring, as the administration proved too willing to give up on various loophole-closings so as to preserve the basic rate-cut schedule (the itemized deduction ceiling was cashiered in April). Congress was prepared to wait out this process until it was complete. By the summer, the tax bill was caught up in greater politics. Southern senators suggested that they might have to hold up the tax bill if Kennedy did not withdraw or severely moderate the civil rights bill he introduced in June. Kennedy dumped most of the reforms, the loophole closings, and conceded to raising the final bill’s top rate from 65 to 70 percent. It passed Mills’s committee and the House at large in September. It was enduring extensive hearings in the Senate Finance committee at the time of Kennedy’s assassination in November. Thereafter, President Lyndon B. Johnson made it clear that passing the bill was required to honor the slain president’s legacy. A reconciled bill passed both houses on February 26, 1964, moments before the Senate filibuster on civil rights began, and was sent up to Johnson’s desk, where it got the presidential signature.

The final bill did away with three-quarters of the reforms, with the modification of the new top rate to 70 percent from 65 percent the only notable change to the rate structure that Kennedy had proposed. In 1964, economic growth was 5.8 percent in real terms. It had been 4.4 percent in 1963, and was headed for a 6.6 percent average in 1965 and 1966. In the prior postwar period, the average span between recessions was slightly over three years, narrowing to about thirty months as the frequency of contractions increased through 1960. Had the 1960s followed trend, a recession would have hit about the time Kennedy announced that he was to introduce Treasury’s tax cut. As it was, recession did not come again until the last month of the decade, December 1969.

While the variables are too imponderable to say with precision that there was a more than post hoc relationship between the rise of the Kennedy Treasury tax cut and the trend-breaking expansion of the 1960s, several claims can be made. The most important of these is that whatever the effect of the tax cut, its lineage can be found in the extensive tax debates surrounding the inoperability of the high rate structure left over from World War II. Arguments that it was mainly a “demand-side” or “Keynesian” tax cut, much less one conceived and brought into being by Kennedy’s CEA liberals, strain for validity in the face of the long history of the debate of which the Compendium was the most extensive entry.

As for Keynesianism, high progressive taxation had proven that it could be co-opted by one key constituency, namely those who were subject to it. The enormous return that accrued to exemptions from high rates such as 91 percent created immense differentials between the willingness of the affected to devote themselves to and pay for tax avoidance strategies (up to and including getting pet statutes written into the law) and the ability of the government to enforce and defend the statutory rates. The high rates lessened the democratic nature of the tax system—a standard argument in the Compendium—in that they increased the traffic of special interests that the government had proven not merely powerless to fend off but rather willing to play along with, as the requests for narrowly tailored relief under the guise of “incentives” came in. A cut in the top tax rates would make those rates more “applicable,” Kennedy’s word at the Economic Club of New York, which is to say less valuable if slipped. And with more economic energy devoted to purposes other than legal tax avoidance, the argument further ran, the real output of the nation stood to grow at a stronger pace as well.