Throughout the summer and fall of 1962, President John F. Kennedy and his advisers struggled to find a politically acceptable way to package the historic income tax cut, later approved by Congress, that became the model for the supply-side tax cuts of the Reagan administration.
According to taped conversations involving Kennedy, his advisers and some key members of Congress, transcripts of which were released yesterday by the Kennedy Library, the officials feared the tax cut might not pass Congress because the federal budget was in the red and there was no clear sign that a recession was on the way.
The budget deficits in question were small--consistently $5 billion to $10 billion, the equivalent of $15 billion to $30 billion in today's dollars. Nevertheless, the political commitment in Congress to a balanced budget was perceived as so strong that Kennedy worried about pressing for a tax cut that fall.
On Aug. 6, 1962, Kennedy met with Rep. Wilbur D. Mills (D-Ark.), chairman of the House Ways and Means Committee, and declared:
" . . . If I go up and ask for a tax cut now, and Congress isn't going to give it to us, it's going to complicate the running for office of a lot of fellows who have to defend: the president's asked for a tax cut; it shows the economy's desperate; and it shows the Democrats have failed to bring the economy back; and it shows that they're fiscally irresponsible.
"And a lot of bastards'll then come out and say they're not for a tax cut, and . . . some will break with me. And in other words, it'll make our problem almost impossible come November . . . I think."
"Your judgment is right," Mills replied.
The powerful Ways and Means chairman--who Kennedy, in later conversations with aides, accused of "arrogance" for delaying the tax bill--told the president:
"You might be able to get the Congress to do this if we were in a depression, if we're starting downhill, and everybody could see we're starting downhill; and you could say that you felt it was better to do this through tax reduction than to get busy with a whole lot of billions of dollars in the nation's public works . . . . "
The following year, with the tax bill before Ways and Means, Kennedy, Mills and several advisers at one point ran down a list of committee members and discussed which were bright and whether they were easy or hard to work with.
"Who's the brightest Republican over there?" the president asked.
"John Byrnes," said Mills, referring to the representative from Wisconsin who then was ranking minority member.
"Oh, Byrnes is as smart as a . . . ," Treasury Secretary C. Douglas Dillon interjected.
"Oh, yeah," Mills repeated. "He's smart. The nicest one of all of 'em is Howard Baker." Baker is now Senate majority leader.
"Howard Baker's the only one that can really work with . . . ," Dillon said.
"Yeah," agreed Lawrence O'Brien, Kennedy's chief congressional lobbyist.
"Yeah," said Mills.
The three volumes of tape transcripts covering the tax cut do not include any meetings before July 30, 1962. Much earlier than that, however, Kennedy's economic advisers--among them Walter W. Heller, chairman of the Council of Economic Advisers, and Paul Samuelson of MIT--had convinced him that a large tax cut was needed for the economy to reach full employment levels.
But a recovery from the 1960 recession began during Kennedy's first year in office and the idea of a tax cut to remove "fiscal drag" that would prevent full employment was temporarily shelved.
Instead, Kennedy proposed some business tax cuts designed to encourage investment, including an investment tax credit for business equipment. The revenue losses were to be offset by other changes, including withholding on interest and dividend payments.
The business tax cuts were passed in altered form but, just like this year, a campaign by banks and other institutions killed the withholding scheme.
Even without any broad tax cut, the administration's economic forecast at the beginning of 1962 showed unemployment falling to 4 percent, then regarded as full employment, by the middle of 1963. However, after Kennedy's historic confrontation with the steel industry in the spring of 1962, the stock market suffered huge losses and administration economists began to worry about a renewed recession and the need for a tax cut to stimulate the economy.
At a June 7 news conference, Kennedy announced that he would offer "a comprehensive tax reform bill" the following January with "an across-the-board reduction in personal and corporate income tax rates . . . . "
As the discussions continued, Kennedy was faced with the prospect of submitting the following year the first $100 billion federal budget. Using today's unified budget approach, which includes trust fund expenditures, that barrier had already been breached, however.
If he kept the figure lower, then it would still rise in the following year, 1964, when he expected to seek reelection.
"Some feel that we're gonna have to break the $100 billion barrier so we might as well break it now as the election year," Kennedy told his advisers at one meeting.
Heller argued that it might be better to have a budget with somewhat higher spending, both because the higher outlays would add to the economic stimulus and because it would give Congress something to cut.
"I suppose there's some validity in the argument that if Congress is going to cut taxes, and they're going to want to make a showing of cutting your expenditure proposals as part of the price of admission of the tax cut," Heller said.
As treasury secretary, Dillon constantly pressed for lower spending.
"The chances of getting any tax reduction is going to be very difficult anyway, and it'll require a showing that we're really trying to hold down expenditures," he said. In particular, Dillon wanted the increase in proposed spending for fiscal 1964 to be smaller than that for fiscal 1963.
Budget Director David Bell, in another discussion reminiscent of recent budget legerdemain, suggested that the 1963 figures might be raised.
"The Congress after all has added a number of things," he pointed out to Dillon. "They moved forward the date of the pay increase, and added money for health research and . . . so on. Then the jump in '63 to '64 would fit your description even of these figures."
In a telephone conversation with Rep. Martha Griffiths (D-Mich.), Kennedy expressed concern about changes organized labor was seeking in the bill and what labor might say about it if the changes were not included.
"I just hate to get a bill out of there which labor or somebody is going to charge is a rich man's bill and all the rest . . . . Now these people, when they get the reductions in the rates which they will get, plus the corporation tax being reduced, plus the small business taxes being reduced, they gonna get a terrific, uh, they're gonna feel very good indeed, and this economy has got a good chance to be really booming. But I, they can kill us . . . if they say, 'Oh, this is a bill which is just taking care of the big people.' "