Examining the JFK Tax Cuts - rocketMBA

Examining the JFK Tax Cuts

In “JFK and the Reagan Revolution”, Larry Kudlow and Brian Domitrovic make the case that the tax cuts JFK proposed in the 1960s jolted the American economy out of a low-growth slump, and formed the basis of the supply-side principles that were used by Ronald Reagan’s administration.

Kudlow is a well-known economic mind who worked in Reagan’s Office of Management and Budget and is currently a senior contributor to CNBC. Domitrovic is a historian, professor, and senior associate at the Laffer Center at the Pacific Research Institute. Both are certainly more on the side of the promotion of free market capitalism.

Regardless of your political or economic views, the book is worth a read. Not only do Kudlow and Domitrovic write about macroeconomics in an understandable way (not an easy feat), they also do an excellent job of depicting the legislative dealmaking that JFK and later LBJ (after Kennedy was assassinated) utilized to get the legislation through.

Here are five of my takeaways from the book:

1. Kudlow and Domitrovic argue that the key goal JFK pursued was, as Kudlow often says, “king dollar and tax cuts.”

I had always thought that the 1950s were a time of economic expansion as the United States exited WWII; however, the book points out that a significant portion of the eight years before JFK’s election had recessions. JFK campaigned with the promise to “get this country moving again.” Kennedy thought that economic growth was vital, because if he could get the economy to expand faster, he would be able to help the poor and provide more funds to improve program such as education. Kudlow and Domitrovic illustrate the evolution of JFK’s thinking on tax cuts, as JFK ultimately came to believe that tax cuts could help lift the country out of its recession. As JFK’s tax cuts were passed (under LBJ after JFK’s assassination), the American economy did, in fact, pick up its growth rate. However, LBJ and Richard Nixon later reversed some of the improvements, and Kudlow and Domitrovic argue that these changes again stifled the growth of the U.S.

2. JFK wanted to cut tax rates across the board while closing tax loopholes.

He went against the tenets of both parties at the time; Democrats did not want to cut tax rates because it would presumably favor the wealthy, while Republicans feared that tax cuts would cause a budget deficit. Additionally, while the top marginal tax rate at the time was 91%, virtually no one paid that rate due to a plethora of tax loopholes and the use of tax shelters. Therefore, the high marginal tax rates distorted the economy due to less incentive to make more money, reduced tax revenues since the wealthy used tax shelters, and increased crony capitalism because large corporations used lobbyists to get favored provisions into the tax code.

3. JFK followed Abraham Lincoln’s “Team of Rivals” approach, filling his staff with people that had liberal economic perspectives as well as those who had more free-market ideas.

This principle is important for all leaders to remember, as a diversity of thought often leads to better decisions, albeit with more conflict that a strong leader must be able to manage. Kudlow and Domitrovic also show that while JFK listened to his advisors, he had no problem going against their consensus to make what he thought was the right decision – a true hallmark of leadership.

4. JFK understood the power of incentives.

One of the most remarkable JFK quotes in the book was when he said, “To increase demand and lift the economy, the Federal Government’s most useful role is not to rush into a program of excessive increases in public expenditures…but to expand the incentives and opportunities for private expenditures.” While JFK knew there is a role for government, he also recognized that if a dollar was transferred from being used by the government to being used by the private sector on the margin, the private individual would spend nearly all of that extra dollar (since saving rates were only between 6-8%) while probably generating a better ROI on that incremental dollar than the government could. JFK came to believe that better incentives came from lower tax rates, rather than high tax rates with loopholes.

5. A recession is often the best time to start a business.

One of my favorite quotes from the book is actually not related to the core message, but so well captures Warren Buffett’s idea of being greedy when others are fearful – “It has long been clear that recessions are a good time to start a business. Not only are odds of a future economic upswing reasonable during a business trough but entrepreneurs can readily assemble labor and capital in the service of their new idea during recessions because so much is idle. The classic example is Andrew Carnegie, who acquired the assets of his steel firm in the wake of the Panic of 1873.”

The book is worth a read, as Kudlow and Domitrovic do an excellent job of writing a book that is both readable and informing. Kudlow and Domitrovic illuminate a pivotal moment in American history, helping us understand an effective leader (JFK) better and illustrating the ramifications for the economics of the United States.

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Before graduating from Stanford GSB with an MBA in 2016, Alex worked for three years in public equity investing. Born and raised in Los Angeles, Alex enjoys hanging out at the beach with friends, playing basketball, and learning about history. He currently works in Equity Research in Downtown LA.


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