The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy

By Lawrence Lindsey | Go to book overview

Chapter 3

Camelot Capitalism and
Keynesian Crisis

"I am convinced that the enactment this year of tax reductions and tax reform overshadows all other domestic problems in this Congress. For we cannot lead for long the cause of peace and freedom if we ever cease to set the pace at home ... I am not talking about giving the economy a mere shot in the arm to ease some temporary complaint. This [tax cut] will increase the purchasing power of American families and business enterprises ... It will, in addition, encourage the initiative and risk-taking on which our free system depends; induce more investments, production, and capacity use; help provide the two million jobs we need every year; and reinforce the American principle of additional reward for additional effort."

—JOHN F. KENNEDY,
State of the Union Address, 1963

The Kennedy Tax Cut proposed in 1963, passed in 1964, and named after the martyred president, is the real starting point of the supply-side-Keynesian debate about the effect of tax rate reductions. For the Keynesians, then in ascendency as the purveyors of the New Economics, the 1964 tax bill represents a masterstroke in economic demand management. For the supply-side school, unborn in 1964, the Kennedy tax cuts exemplify the power of microeconomic incentives. Most important, the fight over the Kennedy tax cuts set the tone for the next fifteen years of tax policy. Though the cuts were successful in themselves, a misreading of their results prompted policies that

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