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I gratefully acknowledge the assistance of W. Elliot Brownlee, Gareth Davies, Junichi Hasegawa, Eisaku Ide, Takehiko Ikegami, Masaru Kaneko, Cathie Jo Martin, Isaac W. Martin, Ajay K. Mehrotra, Monica Prasad, Luke Roberts, and the anonymous reviewers of JPH.
On February 26, 1964, the successor of John F. Kennedy, President Lyndon B. Johnson, signed into law what would be the largest income tax cut in U.S. tax history until 1981 ($11.5 billion). The Kennedy administration proposed two tax cuts, one in 1961 and the other in 1963. The latter, the so-called Kennedy-Johnson tax cut, provided huge cuts for individual and corporate income tax rates and a few structural reforms. In radio and television remarks, Johnson addressed the effects of the tax cut: in the short term, it would increase the income of citizens and businesses, stimulate their consumption and investment, and create new jobs; and in the long term, it would raise the level of the entire American economy.1In addition, he emphasized that the tax cut would result in a robust economy and preserve freedom so that no other country could be stronger than the United States. Then he stated that the federal government "will not have to do for the economy what the economy should do for itself."2
Many existing studies have argued that the tax cut of 1964 elevated the importance of the federal budget and effective fiscal policy as the key to achieving economic prosperity. By the late 1950s, leading economists, particularly presidential economic advisers before the Kennedy administration, increasingly viewed the balanced budget dogma as the main obstacle to rational economic policymaking. They believed that deliberately pursuing a precise level of aggregate taxing and spending would provide the most appropriate economic state. In this context, while restraining the increase in federal social expenditure, the Kennedy administration carried out two large tax cuts, one in 1962, and the other in 1964. After the latter tax cut was accomplished, the United States entered its most prosperous period after World War II. In the late 1960s, the deliberate creation of budget deficits through fiscal policy was no longer considered an evil for policymakers. As Herbert Stein once concluded, through "domesticated Keynesianism," budget deficits became accepted national policy, and the "full-employment...
