Commentary / News

The American System Approach to Tax Reform: JFK Had It Right

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By Nancy Spannaus

Oct. 19, 2017—The battle is on over the Republican tax plan, and there’s no felicitous end in sight. The Republicans are right that economic growth has to be stimulated—but their plan won’t direct money into crucial sectors of the economy. The Democrats are right that the nation can’t afford to give a huge income windfall to those in the top income brackets; it didn’t work to build up the economy before, and it won’t do it this time either. But simply redistributing the wealth won’t do the job.

The solution to the conundrum lies in investment policy–specifically, investment directed into those areas of the economy which will increase the productivity of labor and industry. Tax policy must be subordinated to this national purpose. This idea can be found all the way back in Alexander Hamilton’s Report on Manufactures, and it’s still valid today.

The fact that the Golden Age of U.S. productivity coincided with relatively high rates of taxes on corporate profits and the wealthy should stimulate some thought. (A future article will take this up in more detail.)

Corporate taxes go down as a proportion of Federal income. Interestingly, productivity is falling as well.

JFK’s Approach

Perhaps the best recent example of the American System approach lies in the tax policies of President John F. Kennedy, whom some conservatives claim as the founder of supply-side economics, but who was anything but. Upon entering office, President Kennedy was faced with a stagnant economy, unacceptable unemployment levels, collapsing cities and infrastructure. His approach was twofold, as it had to be.

On the one side, he presented the nation with a national mission in the form of the Apollo project for the moon landing. This was an enormously expensive undertaking, but involved a (still incomplete) technological revolution which eventually provided the last great infusion of scientific advance into the U.S. economy. On the other side, Kennedy proposed a tax reform that combined some reduction in the top marginal tax rate for corporations, with a 7% investment tax credit. The idea was that corporations could get a tax benefit if they invested in new plant and equipment, which would contribute to expanding the output and productivity of the economy as a whole.

Let us be clear about how different Kennedy’s proposal is from what the President and Republicans are proposing today, and how the environment has changed. Back in the early 1960s, corporate tax revenues represented a much greater percentage of Federal tax income (see the chart above). The top marginal tax rate for corporations was 91%–i.e. that was the amount paid in the highest income bracket. President Kennedy proposed to reduce it to 65%–a far cry from today’s 35%, not to mention the 20% level which the Trump tax plan proposes.

JFK at his speech setting out the mission to the Moon.

In addition, the deregulation of the banking system over recent decades has effectively subsidized a shift toward speculative investments (i.e. gambling) rather than investment in the physical economy. Thus any tax windfall, as in the 1980s and 2000s, will do nothing to improve the physical economy. It will pour into real estate speculation, derivatives, or the like.

And although the Republican plan calls for the investment tax credit (ITC), the nature of that credit remains to be determined.  ITC legislation, since it was initiated by JFK, has specified the nature of the investment to be eligible, and the time-span over which the deduction can be taken. While it worked well during the Kennedy era—aiding in expansion in the equipment and machinery industries, and benefiting NASA support investments—it was less effective later on. There was no ITC at all from 1986 through to the Obama administration, at which point it was directed toward “renewable energy” investments—a very narrow, and arguably counterproductive area. Solar panels are not our pathway to a return to the Golden Age of productivity (in the range of 3% growth and up).

Wealth Is Not Money

The irony is this. While there is plenty of “money” in today’s economy—concentrated among the obscenely rich—there is a decreasing amount of real wealth. It is appropriate to increase taxes on the super-rich (FDR even wanted to tax at a 100% rate over a certain income level), but that won’t increase the physical wealth of the nation. That must be done by increasing investment through a tax policy which rewards the kinds of reconstruction the nation needs.

No investment tax credit will be enough. A huge amount of credit must be generated that will create the conditions for a leap in productivity through a dramatic upgrading of transport, power, and water infrastructure, and entry into the nuclear fusion power age.

In other words, nothing works without a Glass-Steagall banking reform (cutting out the speculators) and a Hamiltonian-style national bank. That’s the American System way.

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