America's Fiscal Constitution (42 page)

Kennedy and Mills both appreciated the problems caused by high Cold War tax rates. A study conducted by the Treasury Department and the Ways and Means Committee found that few Americans paid the highest tax rate and that those in the highest bracket lawfully sheltered taxable income. The highest tax rates also resulted in a loss of revenue from outright noncompliance.

After the 1962 midterm elections, with the unemployment rate still at the same level as when he had taken office, the president made the case for lowering personal income tax rates to spur savings and investment. At the insistence of Mills, Kennedy acknowledged that spending would have to be trimmed to try to balance the loss of revenue. The historical link between tax and spending policies remained intact.

13

M
EDICAL
N
EEDS
, W
AR, AND
R
ECESSION

1963–1979: Years when deficits exceeded debt service = 10 (1968, Vietnam; 1970–1973 and 1975–1979, recession and stimulus)

T
AX
C
UTS AND
S
PENDING
R
ESTRAINT

When Chairman Wilbur Mills brought a tax bill to the House floor in September 1963, he circulated a letter from President Kennedy noting that tax reduction must “be accompanied by the exercise of even tighter rein on Government expenditures, limiting outlays to those expenditures which meet strict criteria of national need.”
¹
That commitment to traditional discipline helped secure House passage of the tax bill, though most Republicans voted against it.

Senate Finance Committee Chairman Harry Byrd and all but four of the seventeen Finance Committee members insisted that the administration submit a budget that actually cut total spending, not just freeze spending on everything except defense and space,
before
they would consider a reduction in tax rates. Byrd wanted to reduce spending for fiscal year 1965 to $100 billion, less than had been appropriated for fiscal year 1964.
²
Byrd sharply questioned the commitment of some Kennedy administration officials to the traditional practice of “pay as you go.”

President Kennedy never witnessed the outcome of his tax initiative. The nation grieved for weeks after he was killed in late November 1963.

His successor, Lyndon Johnson, had little time for mourning. Johnson utilized his well-honed legislative skills after taking charge of the budget within weeks of Kennedy’s assassination. The new president told the senior White House staff that they would have to cut spending in the existing budget draft or relinquish any hope of Senate action on the tax cut. He said that asking “Congress to reduce taxes in the face of a budget imbalance” was akin to asking it “to pass a joint resolution endorsing sin.”
³
The new president recounted how a bipartisan coalition of fiscal conservatives in the Senate had dictated budgets even when Franklin Roosevelt enjoyed unprecedented popularity after the 1936 election.

Johnson spent weeks reviewing potential budget cuts with each cabinet secretary. Secretary of Defense Robert McNamara identified the largest amount of spending cuts.

Days after taking office Johnson pressed Byrd to let the tax bill get to the floor. One evening he invited the seventy-three-year-old chairman to the White House and poured him a double shot of his favorite Old Grand-Dad bourbon. Then Johnson complained to Byrd that his failure to allow a vote on the tax bill dishonored the memory of the slain Kennedy. The elderly chairman, one of the few people who continued to address the president as Lyndon, agreed to let the tax bill out of the Finance Committee so long as its staff could review the president’s budget and confirm that it would actually cut spending. A reduction in total federal spending from one year to the next had rarely occurred except after the conclusion of major wars.

In early January 1964 Johnson phoned Byrd to share a surprise: the president had sent a budget to the printer with spending of $97.9 billion, less than the prior year and below the ceiling that Byrd had insisted on.
⁴
Johnson used his first State of the Union address, delivered in January 1964, to highlight the fact that his budget would reduce federal spending to the smallest percentage of national income since 1951. Newspaper headlines about the president’s speech echoed its dominant theme of budget discipline. To make sure that executives of the nation’s largest corporations appreciated his resolve to balance the budget, Johnson briefed them at a private White House dinner. Only later did others begin to focus on another portion of the speech that declared a “war on poverty.”
⁵

Byrd would not personally vote for a tax cut before there was an actual—not merely proposed—budget surplus. He did, however, move
the tax bill to the Senate floor, where it drew fire from conservative Republicans, such as Barry Goldwater, and populist Democrats, such as Al Gore Sr. Senator Gore had warned Kennedy against cutting tax rates to stimulate growth because “the beautiful economic theory about moving taxes up and down” was “utterly impractical, since Congress would always be ready to cut taxes, never to raise them.”
⁶
Johnson also prepared to fend off efforts to amend the bill to cut excise taxes and thereby jeopardize the goal of a balanced budget.

Johnson counted on the bill’s floor manager, Finance Committee member Russell Long of Louisiana, to pass the bill intact. The forty-six-year-old Long, whose playful grin made him look even younger, was known principally for his quick wit.

Senator John McClellan of Arkansas, supported by Republican Minority Leader Everett Dirksen, tried to amend the bill to condition the tax cut on a spending limit of $98 billion.
⁷
Few senators cared to confront McClellan, the stern conservative Democrat who chaired the Permanent Subcommittee on Investigations. Senator Long surprised colleagues by responding with humor. With exaggerated humility, Long asked how he and other senators could possibly support an amendment that would impugn the judgment of the conservative majority on the Senate Appropriations Committee, which set the level of federal spending. To the laughter of various senators, as well as visitors in the gallery, Long slowly named and respectfully defended the honor of each member of the Appropriations Committee, including McClellan himself.

Long succeeded in ridiculing the idea that a majority in Congress would vote in favor of appropriations that set one level of federal spending and also vote not to spend that very amount. An idea that seemed laughable in 1965 would unfortunately become commonplace later on. Most recently, the Budget Control Act of 2011 allowed a majority to vote to appropriate one level of spending and then require that the federal government not spend those very amounts. In 1964, however, the Senate soundly defeated McClellan’s amendment and passed the Revenue Act of 1964, which phased in lower income tax rates. The highest rate fell from 91 percent to 70 percent; the lowest rate dropped from 20 percent to 14 percent.
⁸

Long’s 1964 performance marked the beginning of his powerful influence on the federal budget. In January 1965 he succeeded Harry Byrd as chairman of the Senate Finance Committee and replaced Hubert Humphrey, the newly elected vice president, as Senate majority whip.

In fiscal year 1965 federal funds outlays dropped by $2 billion from the prior year, the only year since 1948 that annual federal funds spending actually declined.
⁹
In the late 1970s Republican congressman Jack Kemp would cite the “Kennedy tax cut” as a precedent for his influential proposal to cut tax rates, the precursor of the major reduction in Cold War tax rates in 1981. Yet, in fiscal year 1965, defense spending—the largest component of the administrative or federal funds budget—fell by almost 10 percent, while in 1981 that spending rose by more than 10 percent.
¹⁰

Barry Goldwater’s 1964 presidential campaign shifted the geographic balance of power within the Republican Party. The passage of the Civil Rights Act of 1964 spurred a steady partisan realignment in the South, but it did not change the broad consensus in support of the American Fiscal Tradition. The square-jawed, candid Goldwater found it difficult to identify cuts in the largest categories of federal funds spending: defense, veterans, and interest on outstanding debt. The Republican platform fashioned by conservative activists in 1964 actually endorsed larger defense spending. Johnson beat Goldwater in a landslide in 1964, a year in which the budget roughly balanced and all federal funds spending apart from interest and national security (including space and veterans programs) represented 3 percent of the national income.
¹¹

M
EDICAL
C
ARE FOR
O
LDER
A
MERICANS

By the early 1960s medical advances had greatly improved the effectiveness of hospital care. Innovations in serology, antiseptic practices, anesthesia, diagnostic practices, pharmaceuticals, and medical specialization had a high price tag. An overwhelming Democratic victory in 1964 increased the pressure on Chairman Mills to ease the burden of rising hospital costs on older Americans.

A federal role in public health was nothing new. By 1950 Congress had adopted all elements of Senator Taft’s plan for state grants to fund hospital construction, medical research and education, and payment of some medical bills of citizens with low incomes. The exclusion of health insurance premiums from federal taxable income had indirectly supported employer-based insurance for workers. By 1960 most industrial employees had some type of medical insurance.

Premiums for employer-based medical coverage were based on the average estimated cost for each group of covered employees. Retired
people—who typically had lower average incomes and higher average medical costs than people who were still employed—often found themselves priced out of the market for private insurance. Social Security benefits had only been raised twice during the preceding decade, while hospital room rates had escalated at nearly 10 percent annually. State and local governments and nonprofits, which operated most hospitals, struggled to cover the costs of charity hospital services for older Americans.

In 1960 Mills and Senator Robert Kerr sponsored legislation authorizing federal grants to match state funding for hospital bills of the “medically indigent.”
¹²
The Kerr-Mills Act was roughly similar to the Eisenhower administration’s proposal that some called “medicare.” State budgets had already been stretched thin in satisfying the demand for education of the enormous Baby Boom generation, so many states found it hard to meet the Kerr-Mills requirement for matching funds. The American Medical Association (AMA) strongly objected to the reimbursement of hospital bills that included charges for salaried physicians. The son-in-law of the AMA’s president, motivational speaker Ronald Reagan, helped the organization fight “socialized medicine.”
¹³

Wilbur Mills had another type of concern about proposals to use Social Security payroll taxes to pay for hospital bills. Pension costs would increase as the population aged, and Mills worried that Social Security would lose public support if payroll taxes reached an upper limit, which Mills and others believed to be about 10 percent of wages. Because of the bipartisan respect for fiscal discipline, both supporters and opponents of federal health insurance expected that the program would require an increase in payroll taxes. Concerns about the level of payroll taxes led to a confrontation that could hardly be imagined after the collapse of limits on debt in the twenty-first-century. In 1964 most Democrats on the Ways and Means Committee blocked an attempt by conservatives, including Mills and all but one Republican, to raise Social Security pension benefits by 6 percent.
¹⁴
Liberal opponents of the pension increase realized that the higher payroll taxation required to support higher pensions might preclude funding needed for a new medical benefit.

Mills treated medical care for older Americans as a practical rather than an ideological challenge. He once explained to an Arkansas chamber of commerce group that sound public policy differed from televised Westerns in which the “good guys” fought the “bad guys.” His job was “understanding . . . problems and picking and choosing among the many solutions
proposed,” an approach he called “the true conservative yet progressive tradition.”
¹⁵

In “picking and choosing among the many solutions” for medical insurance, Mills sought to identify a sustainable source of funding and give physicians an incentive to participate in the program. By 1965 the president and most Senate Democrats embraced a plan that would raise payroll taxes to pay for most of the hospital bills of older Americans, though that coverage would not extend to medical services rendered outside of hospitals. House Republicans, meanwhile, gravitated toward an alternative that would subsidize half the cost of premiums paid by older Americans.

President Johnson encouraged Mills to develop his own plan. He and other Washington observers tried to discern the intention of the powerful chairman during weeks of hearings on the issue. Their speculation ended on March 2, 1965. Mills invited John Byrnes, the ranking Republican on the Ways and Means Committee, to publicly repeat the arguments for the GOP’s alternative of a premium subsidy. After Byrnes finished speaking, Mills stunned those in the room by instructing the committee’s staff to draft a bill with three elements: (1) a new trust fund, financed entirely with payroll taxes, to pay for up to sixty days of hospitalization; (2) subsidized but voluntary premiums paid by older Americans for insurance to cover their fees for physicians—essentially the Byrnes plan; and (3) matching grants to states, like in the Kerr-Mills program, to cover a portion of the medical costs of Americans of various ages without the ability to pay. These three components of the bill were later referred to as Medicare Part A, Medicare Part B, and Medicaid.