The Tax Reduction Act of 1964: Key Provisions

The Revenue Act of 1964, signed into law on February 26, 1964, is a piece of fiscal legislation in United States history. It emerged from an economic environment in the early 1960s marked by concerns over sluggish growth and a desire to stimulate economic activity. The push for a tax cut was a component of President John F. Kennedy’s economic agenda, who believed lower tax rates would boost investment and consumer spending.

Following President Kennedy’s assassination in November 1963, the legislative effort was carried forward by his successor, President Lyndon B. Johnson. Johnson navigated the bill through Congress, securing its passage and fulfilling a part of his predecessor’s vision. The act altered the federal tax landscape by instituting tax reductions for both individuals and corporations, aiming to inject vitality into the nation’s economy.

Individual Income Tax Provisions

The Revenue Act of 1964 brought about substantial changes to individual income taxes, impacting the financial calculations of millions of Americans. A feature of the legislation was a broad reduction in marginal tax rates, which is the rate paid on the last dollar of income earned. These cuts were phased in over two years, 1964 and 1965.

Prior to the act, the federal income tax system featured a highly progressive structure with 24 income brackets, starting at a 20% rate and soaring to a top rate of 91%. The 1964 law compressed this range. For the 1964 tax year, the bottom rate was lowered to 16% and the top rate fell to 77%. In 1965, the second phase of the cuts took effect, with the bottom rate dropping to 14% and the top marginal rate settling at 70%. These rates have since been superseded; under the current structure, the top marginal rate is 37%.

To illustrate the impact, a taxpayer with taxable income up to $500 saw their rate fall from 20% in 1963 to 14% by 1965. Rates were reduced across all income levels, providing a widespread decrease in tax liability and increasing disposable income for a broad swath of the population.

Another provision for individuals was the introduction of a minimum standard deduction. Before this change, taxpayers could either itemize specific expenses or take a standard deduction of 10% of their income. The 1964 act established a new floor for this deduction, which was beneficial for lower-income taxpayers. The standard deduction has since grown, and in recent years, the amount for a single filer has been over $14,000.

Corporate and Business Tax Provisions

The Revenue Act of 1964 extended tax relief to the corporate sector, with the goal of encouraging business investment and profitability. A primary change was the reduction of the top corporate tax rate. Before the act, corporations faced a top rate of 52%, which the new law lowered in two steps: to 50% for 1964 and then to 48% for 1965. This structure was later replaced by a flat 21% federal corporate income tax.

This reduction was achieved by adjusting the two-component structure of the corporate tax: the normal tax and the surtax. The act inverted the rates of these two components. The normal tax, which applied to all corporate income, was reduced from 30% to 22%. This provided a benefit to smaller corporations, as the tax on their first $25,000 of taxable income fell by eight percentage points.

For income above the $25,000 surtax exemption, the surtax rate was adjusted to 28% in 1964 and 26% in 1965. When combined with the 22% normal tax, this resulted in the new top rates. The restructuring was intended to provide greater relief to small businesses. The rate reduction was intended to free up capital for expansion and modernization by increasing the after-tax earnings of companies, providing resources to reinvest and hire more workers.

Structural Reforms to the Tax System

Beyond rate reductions, the Revenue Act of 1964 introduced structural changes to the tax code, altering how and when tax obligations were met. One reform involved the acceleration of corporate estimated tax payments. This provision changed the cash flow dynamics between large corporations and the federal government.

Previously, corporations with an estimated tax liability over $100,000 paid a portion of that excess during the taxable year. The 1964 act implemented a phased-in schedule to make these payments more current. The plan was to gradually increase advance payments until, by 1970, corporations would be paying their estimated tax liability over $100,000 on a pay-as-you-go basis, similar to individual withholding. This change had the effect of boosting government revenues in the short term by speeding up tax collections, even as corporate tax rates were being reduced.

The act also made adjustments to the treatment of capital gains for individuals, introducing an indefinite carryover for net capital losses. Prior to the act, such losses could only be carried forward for five years. This reform provided more flexibility to investors, though the amount of excess loss that can be deducted against other income is limited to $3,000 per year, with any remainder carried forward.

Other structural changes included tightening rules related to the use of multiple corporations to take advantage of numerous surtax exemptions, a move intended to close a loophole.

Economic Rationale and Context

The driving force behind the Revenue Act of 1964 was a set of economic ideas prominent within the Kennedy administration. The tax cut was an application of Keynesian economic theory, which posits that government fiscal policy can be used to manage aggregate demand and stabilize the economy. At the time, policymakers were concerned with “fiscal drag,” where the progressive tax system was pulling too much money out of the economy as it grew, stifling a full recovery.

The belief, championed by economists like Walter Heller, Chairman of the Council of Economic Advisers, was that a permanent tax cut would stimulate the economy more effectively than an increase in government spending. The theory was that by leaving more money with consumers and businesses, the act would boost consumption and investment. This spending was expected to create a multiplier effect, raising the gross national product.

Proponents believed that a more robust economy, stimulated by lower tax rates, would eventually generate a larger tax base and lead to increased federal revenues in the long run. This approach represented a shift in U.S. fiscal policy, embracing the concept of a planned budget deficit as a tool for economic stimulus.

The debate at the time centered on whether to prioritize a balanced budget or to use tax policy proactively to achieve economic growth. The passage of the Revenue Act of 1964 signaled a victory for those who advocated for the latter, setting a precedent for using tax cuts as a primary instrument of economic management.