John F. Kennedy photo

Special Message to the Congress on Tax Reduction and Reform.

January 24, 1963

To the Congress of the United States:

The most urgent task facing our Nation at home today is to end the tragic waste of unemployment and unused resources--to step up the growth and vigor of our national economy--to increase job and investment opportunities--to improve our productivity-and thereby to strengthen our nation's ability to meet its world-wide commitments for the defense and growth of freedom. The revision of our Federal tax system on an equitable basis is crucial to the achievement of these goals.

Originally designed to hold back war and postwar inflation, our present income tax rate structure now holds back consumer demand, initiative, and investment. After the war and during the Korean conflict, the outburst of civilian demand and inflation justified the retention of this level and structure of rates. But it has become increasingly dear--particularly in the last five years-that the largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of Federal income taxes on private purchasing power, initiative and incentive. Our economy is checkreined today by a war-born tax system at a time when it is far more in need of the spur than the bit.

My recommendation for early revision of our tax structure is not motivated by any threat of imminent recession--nor should it be rejected by any fear of inflation or of weakening the dollar as a world currency. The chief problem confronting our economy in 1963 is its unrealized potential--slow growth, under-investment, unused capacity and persistent unemployment. The result is lagging wage, salary and profit income, smaller take-home pay, insufficient productivity gains, inadequate Federal revenues and persistent Budget deficits. One recession has followed another, with each period of recovery and expansion fading out earlier than the last. Our gains fall far short of what we could do and need to do, measured both in terms of our past record and the accomplishments of our overseas competitors.

Despite the improvements resulting from last year's depreciation reform and investment credit--which I pledged two years ago would be only a first step--our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort--thereby aborting our recoveries and stifling our national growth rate.

In addition, the present tax code contains special preferences and provisions, all of which narrow the tax base (thus requiring higher rates), artificially distort the use of resources, inhibit the mobility and formation of capital, add complexities and inequities which undermine the morale of the taxpayer, and make tax avoidance rather than market factors a prime consideration in too many economic decisions.

I am therefore proposing the following:

(1) Reduction in individual income tax rates from their present levels of 20 to 91 percent, to a range of 14 to 65 percent--the 14 percent rate to apply to the first $2,000 of taxable income for married taxpayers filing joint returns, and to the first $1,000 of the taxable income of single taxpayers;

(2) Reduction in the rate of the corporate income tax from 52 to 47 percent;

(3) Reversal of the corporate normal and surtax rates, so that the tax rate applicable to the first $25,000 of corporate income would drop from 30 to 22 percent, so as to give particular encouragement to small business;

(4) Acceleration of tax payments by corporations with anticipated annual liabilities of more than $ 100,000, to bring the corporate payment schedule to a current basis over a five-year transition period;

(5) Revision of the tax treatment of capital gains, designed to provide a freer and fuller flow of capital funds and to achieve a greater equity;

(6) Removal of certain inequities and hardships in our present tax structure; and

(7) Broadening of the base of the individual and corporate income taxes, to remove unwarranted special privileges, correct defects in the tax law, and provide more equal treatment of taxpayers--thereby permitting a larger reduction in tax rates than would otherwise be possible and making possible my proposals to alleviate hardships and inequities.

The tax program I am recommending for enactment in 1963 would become fully effective by January r, 1965. The rate reductions provide a cut in tax liabilities of $13.6 billion--$11 billion for individuals and $2.6 billion for corporations. Other adjustments, some of which lose and some of which gain revenue, would, on balance, produce a revenue gain of $3-4 billion, leaving a net reduction of $10.2 billion. Accelerating tax payments of large corporations to a correct basis over a five-year transition period would reduce the effect on tax receipts to $8.7 billion. These figures do not include off-setting revenue gains which would result from the stimulating effects of the program on the economy as a whole and on the level of taxable income, profits and sales--gains which may be expected to increase as the economy recaptures its vigor, and to lead to higher total tax receipts than would otherwise be realized.


Enactment of this program will help strengthen every segment of the American economy and bring us closer to every basic objective of American economic policy.

--Total output and economic growth will be stepped up by an amount several times as great as the tax cut itself. Total incomes will rise--billions of dollars more will be earned each year in profits and wages. Investment and productivity improvement will be spurred by more intensive use of our present productive potential; and the added incentives to risk-taking will speed the modernization of American industry. Additional dollars spent by consumers or invested by producers will lead to more jobs, more plant capacity, more markets and thus still more dollars for consumption and investment. Idle manpower and plant capacity make this possible without inflation; and strong and healthy economic activity is the best insurance against future recessions.

--Unemployment will be reduced, as firms throughout the country hire new workers to meet the new demands released by tax reduction. The economic prospects of our depressed areas will improve as investors obtain new incentives to create additional productive facilities in areas of labor surplus. Pressure for the 35-hour week, for new import barriers or for other short-sighted and restrictive measures will be lessened. Companies and workers will find it easier to adjust to import competition. Low income farmers will be drawn to new jobs which offer a better livelihood. The retraining of workers with obsolete skills will proceed more quickly and efficiently in a full employment climate. Those presently employed will have greater job security and increased assurance of a full work week.

--Price stability can be maintained. Inflationary forces need not be revived by strengthening the economy at a time of substantial unemployment and unused capacity with a properly constructed program of tax reduction. With the gains in disposable income of wage earners there should be less pressure for wage increases in excess of gains in productivity--and with increased profits after tax there should be less pressure to raise prices. Inflationary expectations have ended; monetary tools are working well; and the increasing productivity and modernization resulting from new levels of investment will facilitate a reduction of costs and the maintenance of price stability. This nation is growing--its needs are growing--and tax revision now will steadily increase our capacity to meet those needs at a time when there are no major bottlenecks in manpower, plant or resources, no emergencies straining our reserves of productive power, and no lack of vigorous competition from other nations. Nor need anyone fear that the deficit will be financed in an inflationary manner. The balanced approach that the Treasury has followed in its management of the public debt can be relied upon to prevent any inflationary push.

--Our balance of payments should be improved by the fiscal policies reflected in this program. Its enactment--which will make investment in America more profitable, ,and which will increase the efficiency of American plants, thus cutting costs and improving our competitive position in world trade-will provide the strongest possible economic backing for the dollar. Lagging growth contributes to a lack of confidence in the dollar, and the movement of capital abroad. Accelerated growth will attract capital to these shores and bolster our free world leadership in terms of both our strength and our example. Moreover, a nation operating closer to capacity will be freer to use monetary tools to protect its international accounts, should events so require.

--Consumers will convert a major percentage of their personal income tax savings into a higher standard of living, benefiting their own families while generating stronger markets for producers. Even modest increases in take-home pay enable consumers to undertake larger periodic payments on major purchases, as well as to increase purchases of smaller items--and either type of purchase leads to further income and employment.

--Investment will be expanded, as the rate of return on capital formation is increased, and as growing consumer markets create a need for new capacity. It is no contradiction to say that the best means of increasing investment today is to increase consumption and market demand--and reductions in individual tax rates will do this. In addition, reducing the corporate tax from 52% to 47% will mean not only greater incentives to invest but more internal funds available for investment. Reducing the maximum individual income tax rate from 91% to 65% makes more meaningful the concept of additional reward and incentive for additional initiative, effort and risk-taking. A rising level of consumer demand will enable the more than $2 billion worth of investment incentives provided by last year's tax actions (the depreciation reform and investment credit) to achieve their full effect. In addition, tax reform will reduce those distortions of effort which interfere with a more efficient allocation of investment funds. The cumulative effect of this additional investment is once again more income, therefore more consumer demand, and therefore still more investment.

--State and local governments, hardpressed by a considerably faster rise in expenditures and indebtedness than that experienced at the Federal level, will also gain additional revenues without increasing their own tax rates as national income and production expand.


The increased purchasing power and strengthened incentives which will move us toward our national goals will reach to all corners of our population and to all segments of our business community.

--Wage-earners and low-income families will gain an immediate increase in take-home pay as soon as the tax program is enacted and new withholding rates go into effect. While tax rates are to be reduced for every bracket, the largest proportionate tax reduction properly goes to those at the bottom of the economic ladder. Accordingly, in addition to lowering rates in the lower brackets, I urge that the first bracket be split into two groups, so that married couples with "adjusted gross incomes" of $2,000 or less (or single persons with $1,000 or less) receive a 30% reduction in their tax rate. Some one-third of all taxpayers are in this group--including many of the very old and very young whose earning powers are below average. Many of the structural revisions proposed below are also designed to meet hardships which rate reduction alone will not alleviate-hardships to low-income families and individuals, to older workers and to working mothers. This program is far preferable to an increase in exemptions, because, with a far smaller loss of revenue, it focuses the gains far more sharply on those who need it most and will spend it quickly, with benefits to the entire economy.

--Middle and higher-income families are both consumers and investors--and the present rates ranging up to 91% not only check consumption but discourage investment, and encourage the diversion of funds and effort into activities aimed more at the avoidance of taxes than the efficient production of goods. The oppressive impact of those high rates gave rise to many of the undue preferences in the present law--and both the high rates and the preferences should be ended in the new law. Under present conditions, the highest rate should not exceed 65%, a reduction of 29% from the present rate-accompanied by appropriate reductions in the middle income ranges. This will restore an idea that has helped make our country great--that a person who devotes his efforts to increasing his income, thereby adding to the nation's income and wealth, should be able to retain a reasonable share of the results.

--Businessmen and farmers--everyone whose income depends directly upon selling his products or services to the public--will benefit from the increased income and purchasing power of consumers and the substantial reduction in taxes on profits. The attainment of full employment and full capacity is even more important to profits than the reduction in corporate taxes; for, even in the absence of such reduction, profits after taxes would be at least 15% higher today if we were operating at full employment. Enactment of a program aimed at helping reach full employment and capacity use which also reduces the Government's interest in corporate profits to 47% instead of 52%, thus lowering corporate tax liabilities by a further $2.6 billion a year--while increasing consumer demand by some $8 billion a year--will surely give American industry new incentive to expand production and capacity.

-Small businessmen with net income of less than $25,000--who constitute over 450,000 of the Nation's 585,000 corporations will, under this program, receive greater reductions in their corporation taxes than their larger competitors. Under my program, beginning this year, the first $25,000 of corporate taxable income will be subject to a tax rate of 22 percent rather than 30 percent, a reduction of almost 27%. This change is important to those small corporations which have less ready access to the capital markets, must depend more heavily for capital on internally generated funds, and are generally at a financial and competitive disadvantage. Unincorporated businesses, of course, will benefit from the reduction in individual income taxes.


A balanced Federal budget in a growing full-employment economy will be most rapidly and certainly achieved by a substantial expansion in national income carrying with it the needed Federal revenues--the kind of expansion the proposed tax revision is designed to bring about. Within a few years of the enactment of this program, Federal revenues will be larger than if present tax rates continue to prevail. Full employment, moreover, will make possible the reduction of certain Government expenditures caused by unemployment. As the economy climbs toward full employment, a substantial part of the increased tax revenue thereby generated will be applied toward a reduction in the Federal deficit.

As I have repeatedly emphasized, our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficits temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget. Because this chronic slack produces inadequate revenues, the projected administrative deficit for fiscal 1964--without any tax reduction, leaving the present system intact-- would be 19.2 billion. The inclusion of the tax program--after the "feed-back" in revenues from its economic stimulus and the acceleration of corporate tax payments--will add only an additional $2.7 billion loss in receipts, bringing the projected deficit in the administrative budget to $11.9 billion. The issue now is whether the strengthening of our economy which will result from the tax program is worth an addition of $2.7 billion to the 1964 deficit.

If the tax brake on our economy is not released, the slack will remain, Federal revenues will lag and budget deficits will persist. In fact, another recession would produce a record peace-time deficit that would far exceed $11.9 billion, and without the positive effects of tax reduction. But once this tax brake is released, the base of taxable income, wages, and profits will grow--and a temporary increase in the deficit will turn into a permanent increase in Federal revenues. The purpose of cutting taxes, I repeat, is not to create a deficit but to increase investment, employment and the prospects for a balanced budget.

It would be a grave mistake to require that any tax reduction today be offset by a corresponding cut in expenditures. In my judgment, I have proposed the minimum level of Federal expenditures needed for the security of the Nation, for meeting the challenge facing us in space, and for the wellbeing of our people. Moreover, the gains in demand from tax reduction would then be offset--or more than offset--by the loss of demand due to the reduction in Government spending. The incentive effects of tax reduction would remain, but total jobs and output would shrink as Government contracts were cut back, workers were laid off and projects were ended.

On the other hand, I do not favor raising demand by a massive increase in Government expenditures. In today's circumstances, it is desirable to seek expansion through our free market processes--to place increased spending power in the hands of private consumers and investors and offer more encouragement to private initiative. The most effective policy, therefore, is to expand demand and unleash incentives through a program of tax reduction and reform, coupled with the most prudent possible policy of public expenditures.

To carry out such a policy, the fiscal 1964 budget reduces total outlays other than defense, space and interest charges below their present levels--despite the fact that such expenditures have risen at an average rate of 7.5 percent during the last nine years. Federal civilian employment under this budget provides for the same number of people to serve every 100 persons in our population as was true when this Administration took office, a smaller ratio than prevailed 10 years ago. The public debt as a proportion of our gross national product will fall to 53%, compared to 57% when this Administration took office. Last year the total increase in the federal debt was only 2 per cent--compared to an 8 per cent increase in the gross debt of state and local governments. Taking a longer view, the federal debt today is only 13 per cent higher than it was in 1946--while state and local debt increased over 360 per cent and private debt by 300 per cent. In fact, if it were not for federal financial assistance to state and local governments, the federal cast: budget would actually show a surplus. Federal civilian employment, for example, is actually lower today than it was in 1952, while state and local government employment over the same period has increased 67 percent. This Administration is pledged to enforce, economy and efficiency in a strict control of expenditures.

In short, this tax program will increase our wealth far more than it increases our public debt. The actual burden of that debt--as measured in relation to our total output--will decline. To continue to increase our debt as the result of inadequate earnings is a sign of weakness. But to borrow prudently in order to invest in a tax revision that will greatly increase our earning power can be a source of strength.



Fully recognizing that it is both desirable and necessary for the Congress to exercise its own discretion in the actual drafting of a tax bill, I recommend the application of the following basic principles in this vital task:

A. The entire tax revision program should be promptly enacted as a single comprehensive bill. The sooner the program is enacted, the sooner it will make its impact upon the economy, providing additional benefits and further insurance against recession. While the full rate reduction program must take effect gradually for the reasons stated below, I am proposing that the individual tax rates for 1963 income be reduced to a range from 18.5 percent to 84.5 percent, with a cut in the withholding rate from the present 18 percent to 15.5 percent becoming effective upon enactment of the law. This will increase the disposable income of consumers at an annual rate of nearly $6 billion a year in the second half of 1963. Also the rate of corporate tax on the first $25,000 of net income would be reduced from 30 percent to 22 percent for the year 1963. Equally important is action in 1963 on the additional individual and corporate rate reductions proposed for 1964 and 1965. The prompt enactment of a bill assuring this combination of realized and prospective tax reductions will improve the business climate and public psychology, induce forward business planning, and increase individual incentives. It will enable investors and producers to act this year on the basis of solid expectations of increased market demand and a higher rate of return. To delay decisive action beyond 1963 risks the loss of opportunity and initiative which this year uniquely offers.

B. The net amount of tax reduction enacted should keep within the limits of economic sufficiency and fiscal responsibility. Too small a tax cut would be a waste, gaining us little but further deficits. It could not cope with the task of closing a $30 to $40 billion gap in our economic performance. But the net tax cut of over $10 billion envisioned by this program can lead the way to strong economic expansion and a larger revenue yield.

On the other hand, responsible fiscal policy requires that we avoid an overly sharp drop in budgetary receipts for fiscal 1964-65, and that we hold the temporary increase in the deficit below the level which in the past has proved both manageable and compatible with price stability. Therefore, to make these reductions possible, I propose a program: (a) to phase the tax reductions over a three year period, with the final step effective January 1, 1965; (b) to couple these reductions, amounting to $13.6 billion, with selected structural changes and reforms gaining $3.4 billion net in revenues; and (c) to offset the revenue loss still further, during the next five years by gradually moving the tax payments of larger corporations to a more current time schedule, without any change in their tax liabilities.

C. Tax reduction and structural reform should be considered and enacted as a single integrated program. My recommendations for rate reductions of $13.6 billion are made in the expectation that selected structural changes and reforms will be adopted, adding on balance $3.4 billion in revenue and resulting in a net reduction in tax liabilities of no more than $10.2 billion. Larger cuts would create a larger budget deficit and the possibility of renewed inflationary pressures. Therefore, should the Congress make any significant reductions in the revenues to be raised by structural changes, these reductions would have to be offset by substantially equivalent increases in revenue; and this could only be achieved by sacrificing either some of the important rate reductions I have proposed or some of the measures I am recommending to relieve hardship and promote growth.

On the other hand, an attempt to solve all tax problems at once by the inclusion of even more sweeping reforms might impair the effect of rate reduction. This program is designed to achieve broad acceptance and prompt enactment.

Some reforms will improve the tax structure by reducing certain liabilities. Others will broaden the tax base by raising liabilities, and will meet with resistance from those who benefit from existing preferences. But if this program of tax reduction is aimed at making the most of our economic potential, it should be remembered that these preferences and special provisions also restrict our rate of growth and distort the flow of investment. They discourage taxpayer cooperation and compliance by adding inequities and complexities that affect similarly situated taxpayers in wholly different ways. They divert energies from productive activities to tax avoidance--and from more valuable or efficient undertakings to less valuable undertakings with lower tax consequences.

Some departures from uniform tax treatment are required to promote overriding national objectives. But taxpayers with equal incomes who are burdened with unequal tax liabilities are certain to seek still further preferences and exceptions--and to use their resources where they yield the greatest returns after tax even though producing less before taxes, thus lowering our national output and efficiency.

Tax reduction is urgently needed to spur the growth of our economy--but both the fruits of growth and the burdens of the resulting new tax structure should be fairly shared by all. For the present patchwork of special provisions lightens the load on some by placing a heavier burden on others. Because they reduce the tax base, they compel a higher tax rate--and the reduction in the top rate from 91% to 65%, which in itself is a major reform, cannot be justified if these other forms of preferential tax treatment remain.

The resistance to tax reform should be less when it is coupled with more-than-offsetting tax reductions benefiting all brackets-and the support for tax reform should be greater when it is a necessary condition for greater tax reduction. Reform, as mentioned earlier, includes top-to-bottom rate reduction as well as structural change--and the two are inseparable prerequisites to the achievement of our economic and equity objectives. The new rates should be both lower and more widely applicable--for the excessively high rates and various tax concessions have in the past been associated with each other, and they should be eliminated together.

In short, these changes in our tax structure are as essential to maximizing our growth and use of resources as rate reduction, and make a greater rate reduction possible. The broader the Congress can extend the tax base, the lower it can reduce the tax rates. But to the extent that the erosion of our tax base by special preferences is not reversed to gain some $3.4 billion net, Congress will have to forego--for reasons of both equity and fiscal responsibility-either corporate or personal rate reductions now contained in the program.


The central thrust of this proposed tax program is contained in the most thorough overhaul in tax rates in more than 20 substantially reducing rates at all levels, for both individuals and corporations, by a total of $13.6 billion. While the principal components of my proposals for rate reduction have been alluded to in the foregoing discussion, it might be well to specify them in detail here.

1. Reduction in individual income tax rates. Personal tax liabilities will creased by $11 billion through a reduction in rates from their present levels of 20-25% to a range of 14-65%, with appropriate reductions generally averaging more than and covering every bracket. The lowest 14% rate would apply to the first $2,000 taxable income for married taxpayers filing joint returns, and to the first $1,000 of the taxable income of single taxpayers--a reduction of 30% in the taxes levied on this new bracket, in which falls the entire taxable income of 1/3 of all taxpayers. The new maximum rate of 65% would enable those individuals who now keep only 9¢ out of each additional dollar earned to retain 35¢ in the future. I am attaching tables showing the proposed rate schedules for married and single taxpayers.

2. These reductions would take place over a 3-year period:

--For calendar year 1963, I propose a rate schedule ranging from 18.5% to 84.5%, reducing the appropriate withholding rate immediately upon enactment from its present level of 18% to a new level of 15.5%. For purposes of taxpayer computations, the new tax rates would apply to the entire calendar year, thus requiring the lower withholding rate to minimize over-withholding.

--For calendar year 1964, I propose a rate schedule ranging from 15.5% to 71.5%, effective for the entire year and accompanied by a withholding rate of 13.5% beginning July 1 of that year.

--For calendar year 1965 and thereafter, I propose a permanent rate schedule ranging from 14 to 65%, maintaining the withholding rate at 13.5%.

3. Reductions in the corporate income tax rate will cut corporate tax liabilities by $2.6 billion per year (in addition to the reduction of $2 billion per year provided by the 1962 investment tax credit and depreciation reform), and take effect in three stages:

--For calendar year 1963, the present normal tax of 30%, applicable to the first $25,000 of taxable corporate income (the entire earnings of almost half a million small corporations) would drop to 22%, a reduction of almost 27%, while the rate applicable to income in excess of $25,000 would remain at 52%, thus reversing the present normal tax of 30% and the surtax of 22%. The normal tax would remain permanently at 22%.

--For calendar year 1964, the corporate surtax would be reduced to 28%, thereby lowering the combined corporate rate to 50%.

--For calendar year 1965 and thereafter, the corporate surtax would be reduced to 25%, thereby lowering the combined corporate rate to 47% and ending the role of the Government as a senior partner in business profits.

4. Since the $25,000 surtax exemption and the new 22% normal rate are designed to stimulate small business, this reduction should be accompanied by action designed to eliminate the advantage of the multiple surtax exemptions now available to large enterprises operating through a chain of separately incorporated units. I, therefore, recommend that legislation be enacted which, over a transitional period of 5 years, will limit to one the number of surtax exemptions allowed an affiliated corporate group subject to 80 percent common control. This proposal would apply both to affiliated groups having a common corporate parent and to enterprises sharing common individual ownership. It will add $120 million annually to tax receipts.

5. On the other hand, if affiliated corporations are treated as an entity for the surtax exemption and other purposes, they should be permitted to obtain the advantages of filing consolidated returns without incurring the present tax of 2% on the net income of all corporations filing such returns. The a percent tax was removed in 1954 from consolidated returns of regulated public utility enterprises; and I recommend that it be repealed for all corporate enterprises beginning in 1964. This proposal will contribute to a more realistic corporate tax rate structure and reduce the adverse effect of high marginal tax rates on growth--at an annual cost to the Treasury of only $50 million.

6. To offset revenue losses by an estimated $1.5 billion per year over the next five years, without increasing the actual net burden of tax liability of corporations, I recommend that corporations with an annual tax liability in excess of $100,000--which are now on a partially current payment basis--be placed on a more current tax payment schedule beginning in 1964. Under this plan, such corporations would make a first declaration and payment of estimated tax on April 15, with subsequent payments due on June 15, September 15 and December 15, reaching a fully current basis similar to that required of individual income taxpayers after a 5 year transition period. More current payment of corporate taxes will strengthen the Government's budgetary position, but will not--even during the five-year transition period--offset the benefits of rate reduction for these corporations.


The changes listed below are an integral part of a single tax package which should be enacted this year. All of them should be effective January 1, 1964. Some remove inequities and hardships and thus further reduce revenues; others recoup revenue by revising preferential tax treatment now accorded particular types of transactions, enterprises or taxpayers. Their combined revenue effect makes possible $3.4 billion of the $13.6 billion reduction in tax rates, for a net reduction of $10.2 billion. But their combined economic effect is even more important-to provide greater equity in a broader tax base, to encourage the full and efficient flow of capital, to remove unwarranted special privileges and hardships, to simplify tax administration and compliance and to release for more productive endeavors the energies now devoted to avoiding taxes. While rate reductions are also a major reform, they are in large part justified and weakened by the absence of substantial rate made possible by structural reform--and the case for structural reform, in turn, would be reduction.

These reforms may be divided into three categories:

A) Relief of hardship and encouragement of growth;

B) Base broadening and equity; and

C) Revision of capital gains taxation for growth and equity.

(A) Relief of Hardship and Encouragement of Growth

1. A minimum standard deduction. I do not believe that the individual income tax should apply at levels of income as low as $667 for single persons and $1,333 for married couples as it does now. One way to provide relief to low income taxpayers--in addition to the splitting of the first bracket as already recommended--would be to raise the personal exemption above its present level of $600. This is an extremely costly approach, however, and one which would not fulfill our objective of giving relief where it is needed most.

As a more effective and less costly means of securing the same objective, I recommend the adoption of a minimum standard deduction of $300 ($150 for each spouse filing a separate return) plus $100 per dependent up to the present maximum of $1,000. Under present law the standard deduction cannot exceed 10 percent of a person's income. The establishment of a minimum standard deduction will provide about $220 million of tax relief, primarily to those with income below $5,000.

If this proposal is adopted, single individuals would remain free of income tax liability until their incomes exceeded 1900 rather than the present $667, thus giving them the equivalent of an increase in the personal exemption of $233. A married couple, without dependents, now subject to tax on income in excess of $1,333, would be taxed only on income in excess of $1,500. A couple with two dependents would be taxed only on income in excess of $2,900, as compared with $2,667 under present law.

2. A more liberal child care deduction. Employed women, widowers, and divorced men are now allowed a deduction of up to $600 per year for expenses incurred for the care of children and other dependents who are unable to care for themselves. In its present form this provision fails far short of fulfilling its objective of providing tax relief to those who must in order to work-meet extra expenses for the care of dependents.

I recommend increasing the maximum amount that may be deducted from the present $600 to $1,000 where three or more children must be cared for. I also recommend three further steps: raising from $4,500 to $7,000 the amount of income that families with working wives can have and still remain fully eligible; increasing the age limit of children who qualify from 11 to 12; and extending the deduction to certain taxpayers who now do not qualify--such as a married man whose wife is confined to an institution.

The revenue cost of these changes in the child care deduction would be $20 million per year, most of which would benefit taxpayers with incomes of less than $7,000.

3. The tax treatment of older people. The special problems encountered by older people are recognized in a variety of not always consistent provisions under the present individual income tax law, resulting in widely different tax burdens for similarly situated older people whose incomes are derived from different sources. The relief is not only unevenly distributed, but, to the extent that its benefits accrue to those with high income, is unnecessary, wasting revenue which could be used to provide more adequately for those who need it.

For example: a single taxpayer aged 65, whose income of $5,000 is entirely in the form of wages, now pays an income tax of $686. If he were retired and his income were in the form of dividends, his tax liability would be less than half as much--$329. Moreover, the extra $600 exemption helps most those with substantial incomes. I am convinced, therefore, that a more uniform and equitable approach, one which will reduce and tend to equalize the tax burdens of all lower and modest income older people, is required.

To this end, I recommend that all people aged 65 or over, regardless of the source of their income, be allowed a credit of $300 against taxes otherwise owing. This credit would replace both the extra exemption allowed to older people and the retirement income credit, and would be of far greater value to the vast majority of older taxpayers. Under present law the amount of retirement income utilized in computing the retirement income credit is reduced, dollar for dollar, by social security and railroad retirement benefits received. The proposed $300 credit would also be reduced but only by a limited amount. (This amount would be equal to the taxpayer's bracket rate times one-half of the benefits--that portion attributable to the employer's contribution.)

This treatment of social security and railroad retirement benefits is more favorable than .present law in its effect on lower and middle income taxpayers; and, indeed, the overall result of this proposal for a $300 credit would be to liberalize substantially the tax treatment of aged lower and middle income taxpayers. Although this provision would moderately reduce the benefits of aged upper income taxpayers, they stand to gain substantially from the general rate reduction and will still pay lower taxes. Those whose incomes are wholly or primarily in the form of social security or railroad retirement benefits, of course, will still not be subject to income tax and these benefits will remain excludable from income.

The enactment of this recommendation will ensure that single older people will not be subject to individual income tax liability unless their incomes exceed $2,900 (for married couples $5,800). These figures contrast with as little as $1,333 for single older individuals and $2,667 for older married couples under present law. It will also remove the existing excessively high tax cost imposed upon those older people who, out of preference or necessity, continue in gainful employment. The vital skills and energies of these older workers should not be discouraged from contributing materially to our economic strength.

A further major advantage of this recommendation is that it will greatly simplify the filing of tax returns for our older people. As much as two-thirds of a page of the individual income tax return now required for computation of the retirement income credit will be eliminated. In addition, a large number of older people who presently file tax returns will no longer find it necessary to do so because the filing requirement will be raised from $1,200 to $1,800.

The revenue reduction associated with these gains in equity and simplicity in the tax treatment of older people will be $320 million per year.

4. Income averaging. Many taxpayers are heavily penalized if they receive income in widely fluctuating amounts from year to year. I have instructed the Secretary of the Treasury to present to the Congress as part of this program an income averaging provision. It will provide fairer tax treatment for those who receive in a single taxable year unusually large amounts of income as compared to their average income for preceding years.

This proposal will go beyond the narrowly confined and complex averaging provisions of present law and will permit their elimination from the Internal Revenue Code. It will provide one formula of general application to those with wide fluctuations in income. This means fairer tax treatment for authors, professional artists, actors and athletes, as well as farmers, ranchers, fishermen, attorneys, architects and others. The estimated annual revenue cost of this proposal is $30 million.

5. Employees' moving expenses. Under present law employees are allowed to exclude from their taxable income any reimbursement received from their employer for moving expenses when changing their place of residence and job location while continuing to work for the same employer. In order to facilitate labor mobility and provide more equal treatment of similarly situated taxpayers, I recommend appropriate extension of this tax benefit to new employees. This recommendation will entail a revenue loss of $20 million per year.

6. Charitable contributions. Under present law an extra 10 percent deduction over and above the basic 20 percent limitation on deductions for charitable contributions is allowable for contributions to churches, educational institutions, and medical facilities and research. I recommend that this limit on the deduction for charitable contributions be liberalized and made more uniform. To this end the 30 percent limit should extend to all organizations eligible for the charitable contributions deduction which are publicly supported and controlled. This recommendation can be implemented at a revenue cost which is minor. But it will prove advantageous to the advancement of highly desirable activities in our communities, such as symphony orchestras and the work of community chests and cultural centers.

7. Research and Development. Current business expenses for research and experimental purposes may now be deducted as incurred. But under present law the cost of machinery and equipment, now so vital to modern research and development activities, must be capitalized and the cost deducted only over the useful life of the machinery or equipment.

As a spur to private research and development, so essential to the growth of our economy, I recommend that expenditures for machinery and equipment used directly in research or development activities be allowed as a current expense deduction.

I am confident that this measure, which will involve a revenue cost of some $50 million, will provide future benefits in the form of better products, lower costs, and larger! markets. These benefits, in turn, will bear: fruit in larger tax bases and budgetary receipts.

(B) Base Broadening and Equity

1. A floor under itemized deductions of individuals. Most taxpayers use the "standard deduction", generally equal to 10 percent of income up to a maximum of $1,000. But ever since this standard deduction was introduced during World War II, the proportion of taxpayers using it has declined steadily. At present, more than 40 percent of all individual income tax returns are filed by people who itemize deductions for a variety of deductible personal expenses, such as State and local taxes, interest, charitable contributions, medical expenses and casualty losses. The amount of itemized deductions claimed on tax returns has gone up sharply-from less than $6 billion in 1942 to $25.7 in 1957 and $40 billion in 1962.

The present practice of allowing taxpayers to deduct certain expenses in full--the only exception being medical expenses which are subject to a 3-percent floor plus a x-percent floor for drugs--raises difficult problems of equity, taxpayer compliance, and tax administration and enforcement. One purpose of itemized deductions is to relieve those taxpayers who are burdened by certain expenses or hardships in unusually large amounts, such as those involved in heavy casualty losses or serious illness. Another purpose is to stimulate certain desirable activities, such as charitable contributions or home ownership. Where such outlays are minimal relative to annual income, no serious hardship occurs and no special incentive is needed.

I, therefore, recommend that itemized deductions, which now average about 20 percent of adjusted gross incomes, be limited to those in excess of 5 percent of the taxpayer's adjusted gross income. This 5 percent floor will make $2.3 billion of revenue available for reduction in individual tax rates. At the same time incentives to home ownership or charitable contributions will remain. In fact, this tax program as a whole, providing as it does substantial reductions in Federal tax liabilities for virtually all families and individuals, will make it easier for people to meet their personal and civic obligations.

This broadening of the tax base which Permits a greater reduction in individual income tax rates has an accompanying advantage of real simplification. An additional 6.5 million taxpayers will no longer itemize their deductions but still benefit overall from the reduced rates and other relief measures.

2. Simplification and liberalization of the medical expense deduction. The medical expense deduction allowed to taxpayers who are under 65 years of age is limited to medical expenses in excess of 3 percent of their income. A separate floor of 1 percent of income is applicable to expenditures for drugs. In the interests of simplification, these two floors should be combined. Under this recommendation, only those medical and drug expenses which together exceed 4 percent of income would be deductible. The qualifying expenses would, of course, along with other itemized deductions, be subject to the general 5-percent floor.

To lighten the burdens of our older citizens, all taxpayers who have reached the age of 65 should be relieved from the present 1 percent floor on drug expenses. They are already exempt from the 3-percent floor on medical expenses.

Under present law there is also a maximum limit on medical deductions of $5,000 for a single person and up to $20,000 for a married couple. This maximum limit represents an anomaly in the law in that it prohibits the deduction of the truly catastrophic expenses for medical care and drugs that are sometimes incurred. I recommend, therefore, that the maximum limit be removed.

Other amendments in the definition of certain medical and drug expenses, designed to prevent abuses, will be required in connection with these changes.

The net revenue change as a result of these recommendations for simplification would involve an increase of $30 million--an insignificant part of the $6 billion of medical expense deductions which are taken today.

3. Minor casualty losses. Casualty losses on property are today fully deductible, without any floor comparable to that applicable to medical expenses to separate the extraordinary casualty from the average run of minor accidents. There is no reason why truly minor casualties--the inevitable dented fender, for example--should receive special treatment under the tax law.

I, therefore, recommend that casualty losses enter into the calculation of itemized deductions only to the extent that they exceed 4 percent of the taxpayer's income. The qualifying expenses would, of course, along with other itemized deductions, be subject to the general 570 floor. This recommendation will increase annual tax receipts by 190 million.

4. Unlimited charitable deduction. Present law permits a handful of high income taxpayers to take an unlimited deduction for charitable contributions, instead of the an to 30 percent of income normally allowable. These taxpayers for a number of years have made charitable contributions in an amount which, when added to their income tax liability, exceeds 90 percent of their taxable income--thus making the contribution fully deductible. Usually these contributions are made in substantially appreciated stock or other property. In this way the appreciation in value, without ever being subject to tax, constitutes a major part of the unlimited deduction. While naturally these generous contributions are beneficial, these taxpayers-given their otherwise high taxable income (up to several million dollars annually in some cases)--should not be escaping all Federal income tax as is the case today. They should be limited to the same 30 percent deduction for charitable contributions as everyone else.

Repeal of the unlimited charitable deduction would mean an annual revenue increase of $10 million.

5. Repeal of the sick pay exclusion. Employees who are absent from work because of illness or injury may exclude from income subject to tax up to $100 a week received under employer-financed wage or salary continuation plans. This "sick pay" exclusion is clearly unjustifiable. The taxpayer escapes tax on the salary he continues to receive, although his substantial medical expenses are deductible; and the employee who stays on the job, even though ill or injured, is in effect penalized for working. The sick pay exclusion--which is of greatest benefit to those with large salary incomes and of far less value to most wage earners-should be repealed. This action would provide $110 million per year in additional revenue.

6. Exclusion of premiums on group term insurance. Neither the current value of group term life insurance protection nor the benefits received thereunder are now subject to tax if purchased for an employee by his employer. This is, in effect, a valuable form of compensation, meeting the widespread desire to provide protection for one's family, which other taxpayers must pay for with after-tax dollars. I recommend that the current annual value to the employee of employer-financed group term life insurance protection be included in income, with an exception for the first $5,000 of coverage to correspond to the present exclusion for insured death benefits.

Revenues would be increased by $60 million per year.

7. Repeal of the dividend credit and exclusion. There is now allowed as an exclusion from income the first $50 of dividends received from domestic corporations, and in addition, a credit against tax equal to 4 percent of such dividend income in excess of $50. I repeat the recommendation made in my 1961 Tax Message that these provisions be repealed.

Proponents of the dividend credit and exclusion argued, in 1954, when these provisions were enacted, that they would encourage equity investment and provide a partial relief to the so-called double taxation of dividend income. Although these provisions involve an annual revenue loss at current levels of $460 million, they have failed to accomplish their objectives. The proportion of corporate funds secured from new equity financing has not increased; and the "relief" gives the largest benefits to those with the highest incomes.

A far more equitable and effective means of accomplishing the objectives of the dividend credit and exclusion is to be found in my recommendation for reduction in the corporate income tax rate. The five-point reduction in that rate will reduce the tax differential against distributed corporate earnings by approximately 10 percent for all taxpayers. The dividend credit, on the other hand, provides much less relief for taxpayers with taxable incomes of less than $180,000 (190,000 for single individuals) and greater relief only for the very highest income recipients.

Moreover, since the benefits of the dividend credit and exclusion go largely to those in the middle and upper brackets, their repeal is necessary to justify the rate schedules I am recommending. Should no action be taken on this recommendation, a higher rate schedule designed to yield an additional $460 million from the middle and upper brackets would be appropriate. This would involve a rate structure scaled to a top rate of 70 percent rather than 65 percent, with appropriate changes in other brackets.

8. Natural resources. We must continue to foster the efficient development of our mineral industries which have contributed so heavily to the economic progress of this nation. At the same time, however, in the interest of both equity and the efficient allocation of capital, no one industry should be permitted to obtain an undue tax advantage over all others. Unintended defects have arisen in the application of the special tax privileges that Congress has granted to mineral industries, and correction of these defects is required if the existing tax provisions are to operate in a consistent and equitable fashion. The changes recommended below will alleviate this situation and yield an additional $300 million per year in revenue.

The following areas in particular suggest the need for revision:

(a) Carryover of excess deductions. Under present tax law, mineral industries are permitted to deduct from taxable income a depletion allowance based on a percentage of gross mineral income but subject to a limit of 50 percent of net income from each producing property. The intent of this net income limit is not always realized, however, because substantial amounts of development costs and other expenses incurred while the property is being developed are not brought into the net income limit for the purpose of computing the depletion allowance, but are instead charged off against income from other sources. The result is that in many cases percentage depletion far exceeds 50 percent of net income earned over the life of the property, when net income is properly defined to include development costs.

One method of removing this defect in present law would be to provide that amounts in excess of gross income from the mineral property, which are deducted against other income of the taxpayer, should be used to reduce the net income from the property (for purposes of computing percentage depletion) in later producing years. These carryover amounts could either be applied fully as the taxpayer obtains income from the property or be spread over several years. The deduction of drilling and development expenditures when made would not be affected; but, regardless of when they were made, they would be taken into account in computing the 50 percent of net income limitation on percentage depletion. This proposal would apply only to expenditures made in taxable years beginning after December 31, 1963.

(b) Grouping of properties. This same 50% limitation imposed by the Congress has also been minimized by the effect of legislation enacted in 1954, which permitted large oil and gas producers to pick and choose properties to be combined into an "operating unit" for the purpose of computing depletion and reducing taxes. Percentage depletion historically has been corrupted separately for each mineral property. This grouping procedure has little or no business significance; and it benefits almost entirely companies with a large number of widely scattered mineral properties. The original strength and purpose of the 50 percent limitation should be restored by returning to the rule that different oil and gas leases or acquisitions may not be combined for tax purposes, and that separate interests may be combined only if they are all on a single lease or acquisition. Such a change would bring tax rules regarding the grouping of properties into accord with business procedures.

(c) Capital gains on sale of mineral interests. The Congress, in Section 13 of the Revenue Act of 1962, recognized that the owners of depreciable business assets were obtaining an unfair advantage by taking depreciation deductions against ordinary income greater than the actual loss in value, and then, upon the sale of an asset, paying only a capital gains tax on the recovery of these deductions. The Congress, therefore, decided that any gains realized on the sale of such property should be taxed as ordinary income to the extent that the cost of the property has been deducted in the past--still permitting the excess of the sales price over the original cost to be treated as a capital gain. This same rule, which under my capital gains proposals discussed below would be extended to real estate and a variety of other situations, should also apply to mineral property subject to depletion, and would increase revenues by $50 million.

(d) Foreign operations. Inasmuch as American firms engaged in oil, gas and mineral operations abroad are permitted the same depletion allowances and expensing of development costs as domestic producers, their United States tax on income from those operations is frequently smaller than the foreign tax they are entitled to credit. The law should be amended to prevent an unused or excess foreign tax credit from being used to offset United States taxes on other forms or sources of foreign income. In addition, the deduction of foreign development costs should apply only to the income from those operations, and should not be permitted to reduce the United States tax on their domestic income.

Action by the Congress in these four areas will adopt the most clearly justified steps needed to place the present system of depletion allowances in a more appropriate framework. In addition, both the Administration and the appropriate committees of the Congress should study more closely the impact of the present percentage depletion rates and their applicability regardless of size or income on the development of our natural resources and the number of investors and producers attracted to the extractive industries. While these are complex as well as controversial problems, we cannot shrink from a frank appraisal of governmental policies and tax subsidies in this area.

9. Personal holding companies. The present restrictions upon the use of personal holding companies have been inadequate to prevent many high-bracket taxpayers from sheltering large amounts of passive investment income in corporations they own and control. By generating a relatively small amount of operating income, or through the use of rentals and royalties as a shield for dividend income, they have been able to avoid personal income taxes upon portfolio investments. I recommend that these provisions be tightened to end these escape routes which permit such passive investment income to be accumulated in closely held corporations at low rates of tax. Such action will increase annual tax revenue by $10 million.

(C) Revision of Capital Gains Taxation

The present tax treatment of capital gains and losses is both inequitable and a barrier to economic growth. With the exception of changes that have added various ordinary income items to the definition of statutory capital gains, there have been no significant changes in this area of the income tax since 1942. The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy. The provisions for taxation of capital gains are in need of essential changes designed to facilitate the attainment of our economic objectives.

I therefore, recommend the following changes, the nature of which requires their consideration as a unified package, coupling liberalization of treatment with more sensible and equitable limitations:

1. Percentage inclusion. Reduce the percentage of long-term capital gains included in individual income subject to tax from the present 50 percent of the gain to 30 percent. Combined with the proposed individual income tax rate schedule ranging from 14 to 65 percent, this will produce capital gains tax rates that will start at 4.2 percent (instead of the present 10 percent) and progress to a maximum of 19.5 percent (instead of the present 25 percent).

With the enactment of this recommendation, the same ratio will exist for all income groups between the tax rate payable on ordinary income and the tax rate payable on capital gains--which is not the case at the present time.

The present 25 percent alternative tax on the capital gains of corporations should be reduced to 22 percent as a part of the reduction of the corporate normal tax rate to 22 percent. This will greatly simplify tax accounting for the more than half a million small corporations subject only to the normal tax.

2. Holding period. Extend the minimum holding period for qualifying for long-term capital gains treatment from the present six months to one year.

Preferential capital gains treatment with respect to gains on assets held less than one year cannot be justified either in terms of long-run economic objectives or equity. Moreover, the present six-months' test makes it relatively easy to convert various types of what is actually ordinary income into capital gains. This proposal will provide far greater assurance that capital gains treatment is confined to bona fide investors rather than to short-term speculators. The new lower rates of ordinary income tax, which will apply to gains realized on holdings of less than six months as well as six months to one year, will mitigate the reduced rate of turnover of securities and other assets that might otherwise result.

3. Carryover of capital losses. Permit an indefinite carryover of capital losses incurred by an individual in any one year.

Under present law capital losses may be carried over for only five years. They may be charged against ordinary income in an amount of up to $1,000 in each of the five years and against capital gains. The five-year limitation frequently works serious hardships on investors, particularly small investors, who incur substantial capital losses and do not within five years have the opportunity to realize gains sufficiently large to absorb them. More adequate capital loss offsets will improve the investment odds, encourage risk-taking on the part of investors, and stimulate economic growth.

4. Tax treatment of gains accrued on capital assets at the time of gift or death. Impose a tax at capital gains rates on all net gains accrued on capital assets at the time of transfer at death or by gift.

Adoption of this proposal is an essential element of my program for the taxation of capital gains; certainly in its absence there would be no justification for any reduction of present capital gain rate schedules.

A number of exceptions would limit the applicability of this proposal to fewer than 3 percent of those who die each year. These exceptions would provide special rules for the transfer of household and personal effects, assets transferred to a surviving wife or husband, and a certain minimum amount of property in every case. Appreciation on property subject to the charitable contribution deduction would continue to be exempt both on gift and at death.

For those who would have a substantial amount of appreciation taxed upon transfer at death, a special averaging provision would prevent the application of higher rates than would have applied upon disposition over a period of years. In addition, it should be clearly understood that the tax upon transfer at death would reduce the size of the taxable estate, and thereby reduce the estate tax. The present provisions for extended payment of estate taxes would apply to the new taxes upon appreciated property transferred at death and would be liberalized.

My proposal, if enacted, would apply to gifts made after this date, but would be phased to apply fully to transfers at death only after three years. The Secretary of the Treasury will present a technical elaboration of this proposal and its relationship to the existing rules for the taxation of various kinds of assets transferred at death.

5. Definitional changes. The wartime increase in the income tax rate structure led to repeated efforts to obtain extension of capital gains treatment to a variety of sources of ordinary income. In some cases this treatment was related to the very high rates of tax on ordinary income. In such cases capital gains treatment is no longer appropriate. In some other cases the justification given for the special treatment was the desire to give a special subsidy to the industry concerned. In other situations, as mentioned earlier with respect to mineral properties, many taxpayers have been able to profit through claiming deductions against ordinary income for expenses, interest, depreciation or depletion, which are later recovered on disposition of property at much lower capital gain rates.

The existing sprawling scope of this preferential treatment has led to serious economic distortions and has encouraged tax avoidance maneuvers sometimes characterized as the "capital gains route." This trend should now be reversed, particularly because of the benefits of the lower capital gains rates as well as lower personal tax rates which I am recommending. Wherever the case for a special subsidy is not compelling, the definitions should be changed to limit capital gains to those transactions which clearly merit such treatment. The details regarding specific proposals in this area will be presented by the Secretary of the Treasury. They will include, but not be limited to, the following:

a. Real estate tax shelters, which are giving rise to increasingly uneconomic investment practices and are threatening legitimate real estate developments; and

b. The tax treatment of restricted stock options. The difference between the price paid for optioned stock at the time of exercise of such an option and the option price represents compensation for services quite as much as do wages and salaries. Under present law, however, such gains are taxed under capital gains rules at very favorable rates and the tax liability may be postponed for many years.

Under present war-inspired high tax rates, compensation arrangements of this kind clearly have their attractions. But under the new, more reasonable rates I am recommending, the favored tax treatment of stock options can no longer be said to be either desirable or necessary; and larger salary payments will be more effective than at present as a means of attracting and holding corporate executives.

I, therefore, recommend that, with respect to stock options granted after this date, the spread between the option price and the value of the stock at the date the option is exercised be taxed at ordinary income tax rates at the time the option is exercised. The averaging provision referred to above which the Secretary of the Treasury will present will prevent a tax penalty due to bunching of income in one year. In addition, payment of tax attributable to exercise of the stock option would be permitted in installments over several years.

This change will remove a gross inequality in the application of the income tax, but it is not expected to yield appreciable amounts of revenue; for the gains to be taxed as compensation to the employee will, as in the case of compensation in other forms, be deductible from the income of the employer.

The overall effect of all these changes in the capital gain provisions affecting individuals and corporations will stimulate a freer flow of investment funds and facilitate economic growth as well as provide more evenhanded treatment of taxpayers across the board. They have a direct positive revenue impact of about $100 million per year. The reduction in the tax rate on capital gains will be somewhat more than offset by the increased revenue from the change in holding period, the taxation of capital gains at death and the changes in definitions--including those affecting real estate shelters and sales of mineral properties.

However, the "lock-in" effect of the present law, due to the ability to avoid all capital gains taxes on assets held until death, will be eliminated. This will result in a sharp increase in transfers of capital assets as individuals feel free to shift to the most desirable investment. The increased volume of transactions under these new rules should, in an average year, yield approximately $700 million in additional revenue. Indeed, this figure will be substantially higher during the first few years after enactment as those who are presently "locked-in" respond to the new situation.


The foregoing program of rate reduction and reform provides for a fair and comprehensive net reduction in tax liabilities at all levels of income. As shown in the attached Table 3, the overall savings are proportionately highest at the lower end of the income scale, where for taxpayers with adjusted gross incomes of less than $3,000 the reduction is nearly 40%. As we move up the income scale, the percentage reduction in tax liabilities declines to slightly less than 10 percent for taxpayers with incomes in excess of $50,000. For all groups of taxpayers combined, the reduction is approximately 18 percent, but five out of six taxpayers--most of whom have incomes below $10,000--will enjoy a reduction of more than 20 percent.

In addition, the proposed reforms will go a long way toward simplifying the problem of filling out tax returns for the more than 60 million fliers each year. Under these proposals more than 6 million people will no longer find necessary the record-keeping and detailed accounting required by itemized deductions. Hundreds of thousands of older people and individuals and families with very low incomes will no longer be required to file any tax returns at all.

Special tax problems of small business, the aged, working mothers and low-income groups are effectively met. Special preferences--for capital gains, natural resources, excessive deductions and other areas outside the tax base--are curbed. Both the mobility and the formation of capital are encouraged. The lower corporate tax rates will encourage and stimulate business enterprise. The reduction of the top 91% rate will assist investment and risk-taking. Above all, by expanding both consumer demand and investment, this program will raise production and income, provide jobs for the unemployed, and take up the slack in our economy.

Members of the Congress: There is general agreement among those in business and labor most concerned that this Nation requires major tax revision, involving both net tax reduction and base-broadening reform. There is also general agreement that this should be enacted as promptly as is consistent with orderly legislative process. Differences which may arise will be largely those of degree and emphasis. I hope that, having examined these differences, the Congress will enact this year a modification of our tax laws along the general lines I have proposed.

To repeat what I said in my Message on the State of the Union--"Now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963."


Note: As printed herein, tables comparing tax rates under the proposed program and the present law have been deleted. The complete message is printed in House Document 43 (88th Cong., 1st sess.).

John F. Kennedy, Special Message to the Congress on Tax Reduction and Reform. Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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