Note: not the supply-side hysteresis channels η that we focused on in the conference draft of "Fiscal Policy in a Depressed Economy", but rather demand-side channels--μ and τ--alone:
Bartlett (2003) http://web2.uconn.edu/cunningham/econ309/lafferpdf.pdf:
In August 1976, [Jack] Kemp received data from the Congressional Research Service on the estimated revenue loss from the Kennedy tax cut. By comparing these revenue loss figures with actual revenue increases from the 1960s, Kemp concluded that the Kennedy tax cut increased federal revenue. Kemp's point was more of an assertion than hard evidence, since he had no data on what aggregate revenues were expected to be in the absence of the Kennedy tax cut. Interestingly, however, Walter Heller, chairman of the Council of Economic Advisers under Kennedy, soon made the case for him. In testimony before the Joint Economic Committee on February 7, 1977, he was asked by Senator Jacob Javits (R-NY) to comment on Kemp's analysis of the CRS memo. I was in the hearing room when Heller gave this response:
What happened to the tax cut in 1965 is difficult to pin down, but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965, before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today's terms. And within 1 year the revenues into the Federal Treasury were already above what they had been before the tax cut.... Did it pay for itself in increased revenues? I think the evidence is very strong that it did (Heller 1977: 161).
Heller was later embarrassed to have provided the supply-siders with the proof they lacked and tried to take it back (Heller 1980). But as a witness to the event, there is no reason to think he was not stating a sincere belief. Indeed, a review of statements by Kennedy, his advisers and supporters at the time clearly indicates their expectation that the tax cut would in fact raise federal revenue. Kennedy said in his Economic Club of New York speech on December 14, 1962:
It is a paradoxical truth that tax rates are too high today and revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now (Kennedy 1963: 869).
During floor debate on September 24, 1963, Wilbur Mills, manager of the Kennedy tax cut in the House of Representatives, said:
There is no doubt in my mind that this tax reduction bill, in and of itself, can bring about an increase in the gross national product of approximately $50 billion in the next few years. If it does, these lower rates of taxation will bring in at least $12 billion in additional revenue (Mills 1963: 17907).
Contemporary analyses by the Council of Economic Advisers (1965: 65-66), Lawrence Klein (1969), and Arthur Okun (1968) suggest that Mills was definitely in the ballpark with his estimate.
Once the impact of the Kennedy tax cut became a political issue in the late 1970s, further analyses were undertaken. Data Resources, Inc. (DRI) and Wharton Econometric Forecasting Associates were contracted to study the impact of the Kennedy tax cut (House Budget Committee and Joint Economic Committee 1978). After reviewing these studies, the Congressional Budget Office drew the following conclusion:
The effect of the 1964 tax cut on the federal deficit has been a matter of controversy.... The direct effect of the tax cut was to reduce revenues by some $12 billion (annual rate) after the initial buildup. The increase in output and later in prices produced by the tax cut, according to the models, recaptured $3 to $9 billion of this revenue at the end of two years. The result was a net increase in the federal deficit of only about 25 to 75 percent of the full $12 billion (Congressional Budget Office 1978b: 25).
Thus, while the Kennedy tax cut may not have paid for itself immediately, there is overwhelming evidence that the federal government did not lose nearly as much revenue as it expected, owing to the expansionary effect of the tax cut on the economy.19 Consequently, Ronald Reagan was really not too far off when he asserted that the Kennedy tax cut paid for itself (Reagan 1982b: 871).
Monetary accommodation, at least as measured by the 10-year Treasury bond rate minus the then-current inflation rate, was substantial--with the proxy 10-year Treasury real rate falling from 3.0%/year to 1.5%/year in the wake of the 1964 tax cut: