Change in Tax Policy of Presidential Candidates   Term Paper ID:27994 Click to get this paper

Essay Subject: Examines history of investment tax credit, origins in the Kennedy administration, modifications in the 1992 campaign, and various economists' perceptions of the viability of the tax.... More...

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Paper Abstract: Examines history of investment tax credit, origins in the Kennedy administration, modifications in the 1992 campaign, and various economists' perceptions of the viability of the tax. Paper Introduction: The recent presidential election hinged very much on economic issues, and both candidates focused on economic matters in differing degrees. This discussion involved several themes, notably rebuilding the weak economy and addressing the issue of the deficit at the same time. Whether this is even possible or not is uncertain. A theme in the Democratic candidates' campaigning was a change in tax policy, and here again there were several specific strands to this theme. The candidate called for increased taxes on the wealthy and reduced taxes on the middle class. He called for the use of the investment tax credit as part of an overall tax reform package. The tax policies promoted by Bill Clinton are reminiscent of the tax policies of John F. Kennedy in 1960, and the consequences for Kennedy were business mistrust and uncertainty such as is already being seen by Clinton Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Kennedy's New Frontier. But if infrastructure investment had the restorativepowers claimed for it, the Bush years would have been a golden age" ("TheClinton Plan," 14). He called for theuse of the investment tax credit as part of an overall tax reform package.The tax policies promoted by Bill Clinton are reminiscent of the taxpolicies of John F. Kennedy's tax policy from beginning to end also shows the necessityof compromise with Congress in order to get anything done at all. "Baby Steps," Time, September 28, 1992, 39-4 .Heath, Jim F. He was the targetof hostile attacks by industrial spokespersons and the business press.Kennedy's 1961 tax proposal included giving industry a tax credit againsttaxes for investments, angering liberal Democrats. It was most recently repealed in the 1986 Tax Reform Actwhen critics charged that much of the $3 billion-a-year revenue loss wentto subsidize investments that would have been made without the tax credit.Business lobbyists at the time said it would return with the nextrecession, and it has. A new version of the investment tax credit has beensuggested by Bill Clinton and by congressional Democrats such as House Waysand Means Committee members Sander M. Levin of Michigan and Frank J.Guarini of New Jersey, and a number of Republicans have also been exploringways to revive the issue (Gleckman, 31). This skepticism vanished in the face of the actuality. Apanel of economic experts brought together by Time magazine said thatClinton's plan would tend to reduce saving by the wealthy without providingmuch of a boost to the middle class. They state that if Congresswants to stimulate business, the way to do it is to cut corporate taxeseven more than they have been. He became particularly interested inthe "new economics" set forth by John Maynard Keynes in his The GeneralTheory in 1936. He says that the measures to speed advances in productivityincluded $3 billion worth of tax incentives to investments in plant andequipment, along with another $3 billion worth of corporate tax ratedeductions in 1964: "The combination of investment tax credits, moreliberal depreciation, and lower corporate rates may be thought of as a $6billion shift from public to private saving, one that offered directinvestment stimulants in the form of expanded cash flows as well asincreased profitability of investment projects" (Heller, 74). . . Economists are divided on the issue. his administration brought the most sophisticated reasoning and the most modern techniques yet to the partnership with business . The investment tax credit was considered an old idea when it wasraised by Clinton during the campaign. Promises Kept: John F. His policies led to a newly buttressed capitalism,and . Yet, this is not whathappened at all. It seems to havethe effect of reducing revenues by a substantial amount at a time when sucha reduction can be a burden; the effect will be the same this time as well. Bernstein reports that Kennedy did not know agreat deal about economics when he started his run for the presidency butthat he learned quickly and that he enlisted the aid of a large number ofeconomists in this learning process. Walter Heller was an important economic adviser to President Kennedy,and he discusses the issue of the investment tax credit and notes howbusiness leaders did not believe it would benefit them. Segments of business today have called for an investmenttax credit, but this does not mean that business is altogether happy aboutBill Clinton's version of this idea. They also argue that business investment inequipment actually increased after the repeal of the tax credit in 1986 andsuggest that what spurs new investment is optimism and not a tax credit.Other economists feel there is a need for the investment tax credit. Given the present situation, it is especially interestingthat one of the issues of greatest concern to Kennedy, to the point wheremany of his advisers thought he was unduly obsessed by it, was the balanceof payments and the gold out-flow leading to a deficit (Bernstein, 119-121). Theysee this as preferable to write-offs, including a capital gains tax cut.One study shows that a 7.5 percent credit would reduce the cost of capitalby 2 to 3 percent, while trimming the effective capital-gains tax rate to2 percent from 28 percent would cut business' cost of capital by only 4.5percent (Gleckman, 31). He says that theKennedy Administration recognized from the outset that it could not hope toachieve its objectives of faster growth, stable prices, and a shrinkingpayments deficit without increasing investment in plants and equipment: "Tomodernize, mechanize, and automate, to translate advanced technology intoactual output--this was essential not only to achieve faster growth but,even more pressing, to cut costs, keep prices stable, and improve ourinternational competitive position" (Heller, 8 ). The investment tax creditwas a success when Kennedy introduced it, though it is arguable whether theeconomy can be stimulated most effectively in this fashion or by some othermeans. The origins of the 1963 tax bill can be found in the preinauguraltask force on taxation that had been commissioned by the President-electand headed by Professor Stanley Surrey, later to be Assistant Secretary ofthe Treasury. "His First 1 Days: The Outlook For Business," Fortune, November 3 , 1992, 4 -54.Gleckman, Howard. A theme in the Democratic candidates'campaigning was a change in tax policy, and here again there were severalspecific strands to this theme. A comparison of the present situationwith that of the Kennedy Administration may be instructive for determiningthe efficacy of the present proposal. Clinton would jugglethe tax code to redistribute income by cutting taxes by $11.5 a week for amiddle-class family of four while raising the top rate from 31 percent to36 percent on incomes above $2 , . Heller writes: "The business community greeted the shifttoward investment emphasis--coming from a liberal Democratic administration--with unhealthy skepticism" (Heller, 8 ). Clinton's tax proposals are expected to bepassed easily by Congress. New York: Oxford University Press, 1991.Birnbaum, Jeffrey H. Murray. Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform. New York: Random House, 1987."The Clinton Plan," National Review, October 5, 1992, 14,16.Dowd, Ann Reilly. Kennedy thought it was unfair that he was so vilified by business,and his relations with business until 1963 were not good. Still, Kennedy wasdenounced as anti-business (Bernstein, 137-138). New York: Harper & Row, 1965. In 1963, though, hesacrificed reform in order to obtain something he considered more important--a tax cut to stimulate economic growth and provide jobs: "His reasoningwas actually quite sound. Kennedyconsidered these glaring inequities in tax policy and wanted them changed,noting that more than one-quarter of the Americans with incomes over $5million a year paid no income tax at all in 1959. "Supply-Side Democrat," The New Republic, September 28, 1992, 23,26-27.Sorensen, Theodore C. He would also place a surcharge onearnings above $1 million. Norton & Company, 1967.Hershey, Barry J. Thisdiscussion involved several themes, notably rebuilding the weak economy andaddressing the issue of the deficit at the same time. BibliographyBernstein, Irving. Heller also explains the effect of such investment tax credits on theeconomy. The candidate called for increased taxeson the wealthy and reduced taxes on the middle class. It would not helpmillions of low- and middle-income taxpayers; the tax cut would" (Heath,149). New Dimensions of Political Economy. The business community first of all doubted that the KennedyAdministration would match its words with action. Third, when the action was implemented, thebusiness community expressed doubts about how much this would help ingiving them an assist in financing new investments. The investment tax credit was first enacted in 1962 as a way to primethe economic pump. Clinton intends theinvestment tax credit to help with needed infrastructure investment andalso believes that this will help the economy, but critics charge that thisis not the case: "All economists regard investment as the key to long-termeconomic growth. Bloomington: University of Indiana Press, 1975.Heller, Walter W. The businesscommunity became so enamored of the investment tax credit that in 1966 whena proposal was made to suspend the credit temporarily and to declare aVietnam moratorium on the credit during the excessive capital goods boom,the business community fought back and demanded that the credit be retained(Heller, 8 -81). Reform would produce more equity but wouldactually affect a relative handful of the more affluent. Clinton's overall tax policy was to include the investment taxcredit, according to what was said in the campaign. It helped pump fresh vitality into the corporate structure, shoring up some of is weaknesses while underwriting its expansion. Taken along with a tax cut, the potential exists for a major reduction inrevenues, though Clinton denies this by noting there are other ways ofmaking revenues increase, including finding and eliminating waste andcheating. Kennedy's decision to institute certain newincentives was a response to this opposition, and in 1962, in an effort tojump-start the economy, the package that was passed included a huge newinvestment tax credit that subsidized the purchase of business equipmentand became one of the biggest tax expenditures in the code, resulting inbillions of dollars of lost revenue to the Treasury each year (Birnbaum andMurray, 14). Now that Governor Clinton has been elected president, the businesscommunity has focused on his tax package and other economic proposals inorder to see how business may be affected, and it is reported thatexpectations are high, particularly for the first 1 days when manychanges will be instituted. The recent presidential election hinged very much on economic issues,and both candidates focused on economic matters in differing degrees. Any cut in the capital gains tax wasalso seen as something that would not have much effect when inflation islow (Greenwald, 39). If the tax reform proposal was not implemented until 1963, itwas because there was the necessity first of passing a smaller taxreduction bill that did not pass until 1962 (Sorenson, 427-428). It was referred to as "theDemocratic favorite business incentive" (Gleckman, 31) and as part of a taxprogram loaded with "sham and evasion" (Rauch, 23). Decade of Disillusionment: The Kennedy-Johnson Years. Kennedy. . As noted, this idea was implemented first during the KennedyAdministration and was part of Kennedy's plan for correcting the economy.Kennedy was noted for his ability to develop programs that would benefitbusiness, and this was seen, rightly or wrongly, as unusual for aDemocratic president. "The Democrats Drag an Old Nostrum Out of the Attic," Business Week, December 16, 1991, 31.Greenwald, John. It was this taxbill that, as it were, enticed the business community to side with Kennedy. & Alan S. New York: David McKay Company, 1976.Rauch, Jonathan. However, all of these efforts are subject to the approval ofCongress and the willingness and ability of bureaucrats to carry throughthe policies that may be instituted, none of which is certain. Kennedywanted tax reform, but in the long run he settled for certain changes thatwere not even entirely in keeping with what he believed about economics.The administration wanted first of all to tighten some of the moreegregious tax loopholes, the special advantages for certain interests, andthe generous personal itemized deductions, estimated to have lowered thegovernment's potential revenue by as much as $4 billion in 1962. Small business leaders are worried about possibletax increases, and they see little value in the investment tax creditbecause they do not have the money to invest in any case. . The investment tax credit in particular wassuggested by Kennedy and was feared by the business community at the timebecause it had no idea how this would be applied or whether it would be ofbenefit or not. Clinton would lower the capital gains rate to 14percent for long-term investments in new companies and crack down inalleged tax avoidance by foreign firms with United States operations. Pragmatic Illusions: The Presidential Politics of John F. Second, the businesscommunity had a suspicion about the form of the action, this new idea of aninvestment tax credit, a 7 percent tax credit for capital outlays onmachinery and equipment. (Miroff, 2 2) Kennedy's innovations were seen as Keynesian, notably the 1963 taxbill which carried his campaign ideas into new territory. That report recommended a sweeping, long-range tax reformbill which would broaden the tax base by closing loopholes, end allinequities of benefit to the few, and make possible as a result lower taxesfor all. Tax reformers feel thatrestoring the tax credit is the first step toward dismantling the 1986 taxact that cut tax rates and reduced subsidies. Kennedy in 196 , and the consequences for Kennedy werebusiness mistrust and uncertainty such as is already being seen by Clintonfor his new proposals. Whether this is evenpossible or not is uncertain. They will include a number of provisions thatmay concern business people and that may also pit small business peopleagainst big business. This was a reform tax bill and not a tax cut that was proposed.There was no intention for the government to take in less in revenues, andgiven the difficulties in the budget such an idea would have beendisastrous. Even if theydid, they would not receive a sufficient tax credit to make it worthwhile.For big business, however, the investment tax credit is another story, asare certain other Clinton proposals: "Clinton's promise to cut capitalgains taxes on long-term investments in new companies, to make the R&D taxcredit permanent, and to grant a 1 percent tax credit on plant andequipment spending" (Dowd, 42). In effect, thisapproach seems to reduce government revenues while increasing the outflowin terms of the tax credits. The American Tax System: A Call For Reform. One would think that this would be a boon to business and that itwould be greeted with smiles from that quarter. Businessthis time will be much more immediately receptive to the investment taxcredit, though small business will be wary because it does not benefit themand may in some way increase their tax burden. For the previous period after his election, his campaign rhetoric wasdissected by the business community in a spirit of mistrust, and thebusiness community seemed to fail to grasp how Kennedy intended tostrengthen and rationalize the corporate structure: "Kennedy's 1963 taxbill was to be the device that finally raised corporate consciousness andcemented the then-fragile alliance between government and business"(Miroff, 2 3). New York: Philosophical Library, 1984.Miroff, Bruce. However, at the time andin spite of this need, business fixed investment had dropped from 11percent of GNP early in the postwar period to roughly 9 percent after 1957: "The clear answer, though un-Democratic in tradition, was to offer specialtax incentives for investment in machinery and equipment" (Heller, 8 ). Kennedy. Kennedy did not have an easy time getting his bill passed, and thehistory of tax reform shows that there has always been considerableopposition to it even as there has also been a good deal of support.Stanley Surrey was an outspoken critic of tax breaks and incentives, andCongressional opposition to his proposals was intense, as was oppositionfrom the oil and gas industry, the mining industry, the savings-and-loanassociations, and others. New York: W.W. it lifted the corporate giants out of the doldrums of the 195 s. A bill that excluded most of the reforms was passed, while the billincluding the reforms never would have been passed.CONCLUSION The investment tax credit introduced by Kennedy became the darling ofthe business community that had originally rejected it. Kennedy's administration thus showed the same approach to solving thecountry's economic problems, an investment tax credit for business, and atax cut for others along with loophole-closing measures. The idea has slipped in and out of the tax code seventimes since then. There were several reasons forthis. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.