Politics & Policy

Tax Cut of the Century

What the GOP can learn from the 1948 Revenue Act.

Although conservatives are not pleased that John McCain voted against the Bush tax cuts, it should encourage them that the presumptive GOP nominee has adopted virtually their entire economic platform. Not only is the Arizona senator committed to renewing the Bush tax cuts and eliminating the AMT, he is calling for initiatives with appeal to Wall Street: cutting the corporate tax rate to 25 percent, first-year expensing of business equipment and technology, and a new business credit for research and development.

Yet if party leaders think this will resonate with voters on Main Street — including rank-and-file Republicans — they may need to think twice. To make his tax package sizzle, McCain should add two ingredients that graced the most important tax cut of the 20th century, the Revenue Act of 1948. Enacted 60 years ago today, when an allegedly “do-nothing” Republican Congress overrode President Harry Truman’s veto, the legislation helped usher in the Fabulous Fifties, an era when both the economy and the American family flourished.

The 1948 act was not the largest tax cut of the century. But unlike the tax cuts of the Kennedy, Reagan, and Bush eras, the measure nursed near-record levels of industrial growth and economic expansion without sacrificing family size, moving nearly half of all married mothers into the full-time labor market, or reducing the relative earnings of married men. Nor did the good times coincide with the unraveling of the family, another plus that puts the economic performance of the past generation in perspective.

In fact, the 1948 Revenue Act contributed to a turnaround — between 1945 and 1963 — of social indicators that some sociologists claim today are irreversible. Not only did marriage rates rise, but the proportion of adults reaping the joys of marital bliss hit a record: 95 percent of Americans coming of age then would tie the knot. Marital fertility rates doubled between 1944 and 1957, raising average family size from two to nearly four children, securing baby boomers a wealth of siblings and cousins and their progeny a wealth of aunts and uncles. Also good for the younger set, the divorce rate declined for the first time in history, reaching a low of about 9 divorces per 1,000 married women in 1958.

Other factors surely contributed to create what Dartmouth professor emeritus Jeffrey Hart praises as “an extraordinary period in American life” in his 1982 book, When the Going Was Good! Yet analyses by social historian Allan Carlson and the late Georgetown economist Leslie Whittington reveal that the marriage and baby booms of the postwar era would not have happened without the “family” provisions of the Revenue Act of 1948. To an extent greater than any tax legislation since, the tax cut recognized matrimony, the two-parent family, and robust fertility as building blocks of a growing economy.

Building upon the family orientation of the New Deal, the 1948 tax cut introduced universal income splitting, allowing all married couples to split their income in half when calculating their tax rates. In effect, a married couple would pay the same percentage as would a single filer with half the income. This offered an incentive to getting married and staying married.

Just as important, income splitting enabled spouses to differentiate more than equalize their responsibilities, yielding what Nobel laureate Gary Becker would later quantify as efficiencies in the market and at home, allowing most families to raise a full quiver of children on one paycheck. It didn’t mean mothers couldn’t work outside the home, but it leveled the playing field for the one-paycheck household.

Further reinforcing marriage, the legislation boosted the personal exemption from $500 to $600, a jump from 15 percent to 18 percent of the median income of married-couple families at the time. Although the mortgage-interest deduction also introduced in 1948 would help, the personal exemption played the much larger role in reducing the taxable income of a median-income family with three children to zero.

Had Congress indexed the exemption to inflation, it would today be worth $5,000; had the exemption remained the same percentage of median married-couple family income, it would be worth $12,000 in 2005. Leslie Whittington’s 1990 study in the American Economic Review, finding a robust correlation between the national birth rate and the tax value of the exemption, clearly suggests that the 1948 boost played a role in a rising birthrate for 15 years.

Beginning with the Kennedy cuts of 1964, most subsequent tax legislation served to undo the 1948 achievement, in effect raising taxes on marriage and children. Not only has this contributed to the angst the public vents even when the GDP and stock market rise — it may also help explain why “tax cuts” seem to have less electoral traction than they once did.

Congress, of course, can’t bring back the 1950s, but McCain and the GOP should seek a revival of income splitting as well as a more equitable personal and dependent exemption — two tax-cutting strategies as important as corporate tax breaks. A commitment to universal income splitting would finish what President Bush started, as his 2001 tax cut returned the feature to the two lowest tax brackets. All brackets for married filers should be set at one-half the income of single individuals as recognition that marriage is an economic partnership that benefits all segments of society.

Secondly, McCain should embrace a boost in the personal exemption to at least $7,500 and a repeal of income phase-outs for married filers. Yet to make up for lost time and boost fertility, the party should also demand more mileage out of the per-child tax credit. As David Frum laments in Comeback, income phase-outs preclude many parents from fully realizing the $1,000 credit. Also, the credit is non-refundable, meaning that it can only reduce a person or couple’s tax burden — parents whose tax bills come to less than $1,000 times the number of children they have don’t get the full benefit. These parents are typically of modest means.

McCain should therefore call for eliminating income limits for married filers, and making the credit applicable to Social Security and Medicare taxes for all filers. Given that the credit amount was first proposed almost 20 years ago, raising the credit to at least $2,000 and indexing it to inflation are also warranted. Furthermore, the age of child eligibility should be increased to 19, giving parents two additional years to claim the credit.

Critics will claim that such measures would shortchange Congress of revenue. Truman made the same argument throughout 1947, vetoing two other tax cuts, but the Republicans prevailed a year later. As Sen. Robert Taft argued: “The best reason to reduce taxes is to reduce our ideas of the number of dollars the government can properly spend in a year, and thereby reduce inflated ideas of the proper scope of bureaucratic authority.” Mr. Conservative may not have fully known the dividends that the tax cut of the century would yield, but his party understood the need to shelter the family, not just business, from the ambitions of the modern democratic state.

John McCain should do no less. By ensuring his platform fully recognizes the economic assets of marriage and fertility, he would raise GOP identification among voters and, most important, offer hope that America will remain on a different demographic path than Europe. As in 1948, it’s a winning recipe not only for the family, but also for the economy.

– Bob Patterson is an adjunct research fellow at the Howard Center for Family, Religion & Society of Rockford, Ill. The opinions expressed here are his own.

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