Cutting Taxes to stimulate the economy: The Kennedy and Bush Tax cuts When John F.

Kennedy became president of the United States in 1961, he brought to Washington some of the brightest young economists of the day to wor on his !ounci" of #conomic $d%isers. &hese economists, who had been schoo"ed in the economics of Keynes, brought Keynesian ideas to discussions of economic po"icy at the highest "e%e". 'ne of the counci"(s first proposa"s was to e)pand nationa" income by reducing ta)es. &his e%entua""y "ed to a substantia" cut in persona" and corporate income ta)es in 196*. &he ta) cut was intended to stimu"ate e)penditure on consumption and in%estment and "ead to higher "e%e"s of income and emp"oyment. When a reporter as ed Kennedy why he ad%ocated a ta) cut, Kennedy rep"ied, +&o stimu"ate the economy. ,on(t you remember #conomics 1-1./ $s Kennedy(s economic ad%isers predicted, the passage of the ta) cut was fo""owed by an economic boom. 0rowth in rea" 0,1 was 2.3 percent in 196* and 6.- percent in 1962. &he unemp"oyment rate fe"" from 2.4 percent in 1963 to 2.5 percent in 196* and then to *.2 percent in 1962. #conomists continue to debate the source of this rapid growth in the ear"y 196-s. $ group ca""ed supp"y6siders argues that the economic boom resu"ted from the incenti%e effects of the cut in income ta) rates. $ccording to the supp"y6siders, when wor ers are a""owed to eep a higher fraction of their earnings, they supp"y substantia""y more "abor and e)pand the aggregate supp"y of goods and ser%ices. Keynesians, howe%er, emphasi7e the impact of ta) cuts on aggregate demand. 8ost "i e"y, both %iews ha%e some truth9 &a) cuts stimu"ate aggregate supp"y by impro%ing wor ers( incenti%e and e)pand aggregate demand by raising househo"ds( disposab"e income. When 0eorge W. :ush was e"ected president in 5---, a ma;or e"ement of his p"atform was a cut in income ta)es. :ush and his ad%isors used both supp"y6side and Keynesian rhetoric to ma e the case their po"icy. ,uring the campaign, when the economy was doing fine, they argued that "ower margina" ta) rates wou"d impro%e wor incenti%es. :ut when the economy started to s"ow, and unemp"oyment started to rise, the argument shifted to emphasi7e that the ta) cut wou"d stimu"ate spending and he"p the economy reco%er from the recession. !ongress passed ma;or ta) cuts in 5--1 and 5--3. $fter the second ta) cut, the wea reco%ery from the 5--1 recession turned into a robust one. 0rowth in rea" 0,1 was *.* percent in 5--*. &he unemp"oyment rate fe"" from its pea of 6.3 percent in June 5--3 to 2.* percent in ,ecember 5--*. When 1resident :ush signed the 5--3 ta) bi"", he e)p"ained the measure using the "ogic of aggregate demand9 +When peop"e ha%e more money, they can spend it on goods and ser%ices. $nd in our society, when they demand an additiona" good or ser%ice, somebody wi"" produce the good or a ser%ice. $nd when somebody produces that good or a ser%ice, it means somebody is more "i e"y to be ab"e to find a ;ob./