When President Richard Nixon decided to dismantle the Bretton Woods monetary system, it stunned the world. So did his imposition of wage and price controls. Forty years later, we’re still talking about both.
By contrast, the fiscal elements of Nixon’s New Economic Plan have been long forgotten. And for good reason. Most were — as Amity Shlaes noted earlier this week — simply “short-term gimmicks” designed for political rather than economic effect.
Still, good lessons can be learned from bad examples. In particular, the story of Nixon’s “job development” tax credit can teach us how not to run a revenue system.
Nixon’s economic package was designed to address a range of problems, including a sagging dollar, persistent inflation and rising unemployment. The job development credit took aim at the last.
The name was the only thing actually new about this provision. In substance, it was simply a rebranded version of President John F. Kennedy’s investment tax credit, enacted in 1962.
Nixon’s version was slightly more generous than Kennedy’s, providing a one-year, 10 percent credit for business investment in new equipment (as opposed to the 7 percent provided by Kennedy). During a second (and final) year, Nixon’s credit was to be scaled back to 5 percent.
The president had high hopes for his reform. “This tax credit,” Nixon predicted, “will not only generate new jobs; it will raise productivity; it will make our goods more competitive in the years ahead.”
Economists were skeptical. After all, the Kennedy credit hadn’t been a slam-dunk success. As the Wall Street Journal pointed out, the unemployment rate had actually risen for 18 months after Kennedy’s credit was enacted; the rate had been falling for the previous 18 months. Not exactly the sort of data to inspire imitation.
Nevertheless, Nixon’s version of the investment credit won predictable support from the business community. What’s not to like when someone is offering you a tax cut?
But the credit attracted plenty of criticism from Democrats and organized labor, who described it as “Robin Hood in reverse.” The credit would shower benefits on big business, they charged, while doing little for average Americans. And since Nixon sought to cover the cost with a variety of spending reductions, the net effect would be even more regressive.
Many experts were inclined to agree. Economist Robert Eisner suggested that the investment credit (in conjunction with other business tax incentives like accelerated depreciation) served simply to lower the effective corporate tax rate while sidestepping public scrutiny.
“A proposal to cut the corporate tax rate openly by ten percentage points would, at the least, provoke one lively controversy,” Eisner wrote in Challenge magazine in 1973. “Yet just that has been accomplished — in a much less efficient way — without the general public’s having any notion of what happened!”
Still, there was one argument for investment incentives that even critics were prepared to accept. “In a period of high unemployment,” Eisner wrote, “something is better than nothing.”
More specifically, when political realities close the door on more effective policies (like stimulating demand through increased public spending) then investment subsidies might be the best option available. Even then, their failings were hard to ignore. “In our free-enterprise economy, business firms should be expected to invest an optimal amount without subsidies from the government,” Eisner concluded.
For Nixon’s advisers, the tax provisions of the New Economic Plan had always been a sideshow. They were, recalled Paul W. McCracken, chairman of the Council of Economic Advisers, “not large enough to be of major significance.”
What they lacked in economic significance, however, they made up for in political impact. The job development credit — cynical from the start, as evidenced by its rebranding to highlight ostensible effects on employment — was a key moment in the symbolic use of tax policy.
In the years since, politicians have learned to love tax gimmicks dressed up as meaningful economic policy. Democrats have become especially reliant on them as political support for direct spending has dried up during the past 30 years. And Republicans embrace them as simply another way to lower taxes.
But tax gimmicks are bad for at least two reasons. First, they give the illusion of action when real action is badly needed. The various job-creation tax credits now under consideration in Washington are a case in point. Sometimes, something isn’t better than nothing — at least when it saps support for doing something that actually helps.
Second, tax gimmicks are bad because they serve as a sort of magician’s misdirection, distracting voters from the real impact of policies. Calling a tax credit — or profits repatriation, for that matter — a “jobs” program doesn’t actually make it one.
Good tax policy is simple, straightforward and honest. Which is why we almost never see it in Washington. But that doesn’t mean we shouldn’t demand it.