On August 15, 1971, President Nixon unveiled a package of economic policies to jump-start a sluggish economy. His message featured a range of proposals, some rather tepid and conventional, others quite dramatic and controversial. It was the latter that gave rise to the name later used to describe the speech: the Nixon Shock.
After the heady days of the mid-1960s, growth had slowed during the second half of the decade, eventually turning negative in 1970. Unemployment had risen from 3.5 percent in November 1969 to 6.1 percent on the eve of Nixon’s speech. But consumer prices had continued their steady climb upward; from a low of 1.1 percent in 1961, inflation had risen to 3.0 percent by 1966 and to 5.84 percent by 1970. By the time of Nixon’s address, it had cooled slightly, but was still running near
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All in all, the numbers told a worrisome story — one whose effects Americans felt in their everyday lives. But in his televised address, Nixon promised to deliver a solution. He offered two proposals that were especially dramatic.
Controversial and Dramatic
The first took aim at inflation, the most persistent of the nation’s problems. “The time has come for decisive action — action that will break the vicious circle of spiraling prices and costs,” Nixon said. “I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days.” Nixon also asked corporations to freeze shareholder dividends for the same period.
The wage and price freeze was controversial, but it was also remarkably popular. As Gene Healy wrote for the Cato Institute in 2011: “After Nixon’s announcement, the markets rallied, the press swooned, and, even though his speech pre-empted the popular western Bonanza, the people loved it, too — 75 percent backed the plan in polls.”
Nixon’s second bombshell involved the convertibility of the U.S. dollar to gold — a policy that most people took for granted and that functioned as a bedrock principle of the Bretton Woods system of fixed exchange rates established after the end of World War II.
“I have directed [Treasury] Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets,” Nixon told the nation, “except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”
American currency Dollar and Gold ingot combinations. Close up for dollar and gold ingot
Under the Bretton Woods system, the values of global currencies were fixed in relation to the U.S. dollar, which was in turn valued in relation to gold at a set rate of $35 per ounce. Nixon’s decision to suspend the convertibility of the dollar into gold began a process that eventually unraveled that system, leading to a new system of floating exchange rates.
Tax Proposals
Nixon’s New Economic Policy, as his complete package of policies was known, also contained several tax proposals, including tax cuts for both businesses and individuals — although the White House and Congress would soon be fighting over which group was getting a better deal. Among the most notable proposals:
- A new investment tax credit. Nixon called his proposed investment credit “the strongest short-term incentive in our history to invest in new machinery and equipment.” He promised that it would “create new jobs for Americans” by giving companies a 10 percent job development credit for one year, followed by a 5 percent credit afterward. “This tax credit for investment in new equipment will not only generate new jobs; it will raise productivity,” Nixon said. “It will make our goods more competitive in the years ahead.”
- Repealing the excise tax on automobiles. Nixon called on Congress to repeal the 7 percent excise tax on new cars. The tax was already slated to disappear in 1982, but Nixon urged lawmakers to abolish it immediately. Getting rid of the tax would translate into a price reduction of about $200 per vehicle, Nixon said, adding that he would “insist that the American auto industry pass this tax reduction on to the nearly 8 million customers who are buying automobiles this year.” Lower car prices would help stimulate the economy as a whole, Nixon predicted: “Lower prices will mean that more people will be able to afford new cars, and every additional 100,000 cars sold means 25,000 new jobs.”
- Accelerating scheduled increases in individual income tax exemptions. Nixon proposed speeding up the scheduled increases in personal income tax exemptions, which were already set to rise on January 1, 1973. If the increases were moved up to January 1, 1972, taxpayers would see their exemptions grow by $50 a full year early. “This increase in consumer spending power will provide a strong boost to the economy in general and to employment in particular,” Nixon predicted.
Nixon promised that his package of tax reductions would transform the economy. “The tax reductions I am recommending, together with this broad upturn of the economy which has taken place in the first half of this year, will move us strongly forward toward a goal this nation has not reached since 1956, 15 years ago,” he declared. “Prosperity with full employment in peacetime.”
Nixon was aware, however, that tax cuts could add to inflationary pressures. To avoid adding fuel to the fire, he paired his tax cuts with cuts in government spending, including delays in scheduled pay increases for federal employees. “Tax cuts to stimulate employment must be matched by spending cuts to restrain inflation,” he explained.
Business vs. Individual Cuts
On Capitol Hill, Nixon’s tax proposals got a generally favorable reception — at least initially. Democrats, who controlled both houses of Congress, shared Nixon’s worry about the economy. As the Joint Committee on Internal Revenue Taxation (JCIRT) summarized congressional thinking at the time:
The growth of our gross national product was small, unemployment was too high, and capital goods expenditures were hardly growing at all. Despite these factors, which would usually point toward deflation, the economy was unable to shake the persistent inflationary trend of prices. All this was compounded by our serious adverse balance of trade and the accompanying crisis in the position of the dollar abroad.
Nixon couldn’t have said it better himself.
But Democrats still had concerns about the Nixon program. In general, they thought it was too generous to business and too stingy with individuals — especially those in lower income brackets. To some extent, this was a question of fairness. But it was also a matter of efficacy. While the White House was focused primarily on stimulating business investment, lawmakers were at least as worried about boosting consumption.
The JCIRT summarized this classic tension between supply-side and demand-side approaches to managing the economy. “The Congress was guided not only by the need to adopt a proposal which is fair,” the panel said in its explanation of the legislation, “but also by the fact that the restoration of sound and vigorous economic conditions required the stimulation of both consumption by individuals and investment by business.”
UNITED STATES – JANUARY 01: Congressman Wilbur Mills. (Photo by Dick Swanson/Getty Images)
House Ways and Means Chair Wilbur Mills, D-Ark., was a key figure in congressional efforts to strike a balance. He initially greeted Nixon’s proposals with approval, telling reporters that the plan was “a good one.” But he hinted that Congress might expand some of the president’s cuts, especially the ones focused on individuals.
Democratic complaints about Nixon’s plan continued to grow after Congress left Washington for its summer recess. “The bulk of the criticism of the President’s proposals has come, so far, from liberal Democrats,” The New York Times reported, “who say, in a nutshell, that they provide too much tax relief for business and not enough for individuals.” The only meaningful relief measures directed at actual people, these critics contended, were the exemption increases — and these were already slated to increase the following year anyway.
To strike a better balance, Democratic leaders agreed to scale back some of Nixon’s business cuts and replace them with more generous provisions for individuals. The act as passed by Congress and signed by the president in December 1971 reflected these changes.
Key Provisions of the Act
Congress began by transforming the investment tax credit into a flat 7 percent rather than accepting the administration’s proposal for a two-step credit with 10 percent the first year followed by 5 percent thereafter. Lawmakers also scaled back the generosity of the administration’s depreciation enhancements enacted earlier in the year.
Individuals got the early increase in their exemptions that Nixon had requested; exemptions rose from $650 to $700 in 1971 and were scheduled to rise by another $50 in 1972. In addition, lawmakers increased the minimum standard deduction, also known as the low-income allowance, for those in lower income brackets. “This latter action gave assurance that the individual income tax would not be imposed below the poverty level,” explained the JCIRT.
Congress also added a special deduction of up to $400 per month for child care and domestic help expenses, available to parents with children under the age of 15 or people with disabled dependents. The act also created a special tax credit for employing welfare recipients, equal to 20 percent of the wages paid.
Money in Politics
The act also featured two tax provisions that touched on the sometimes contentious link between money and politics. The first provision was relatively uncontroversial, but the second provoked a bitter fight between the parties.
In a bid to encourage donations to political campaigns, Congress created a tax credit equal to one-half of an individual’s annual political contributions, up to a maximum credit of $12.50 (or $25 for a joint return). Alternatively, taxpayers could claim an itemized deduction up to a maximum of $50 (or $100 for joint returns). Lawmakers made the credit or deduction available for donations to candidates running for any federal, state, or local office. It also applied to donations to political committees.
(Photo by Bettmann Archive/Getty Images)
The second money-in-politics provision concerned public financing of presidential campaigns. Sen. John Pastore, D-R.I., offered a floor amendment allowing taxpayers to designate $1 of their tax liability for a presidential election campaign fund, using a new “checkoff” on their return. Money from the fund would be given to presidential candidates who met certain qualifying conditions and agreed to abide by spending limits.
Republicans bitterly opposed the Pastore amendment, and the Senate spent four days debating it. President Nixon even threatened a veto over the issue. But the checkoff and its resulting fund survived this frontal assault, making its way into the final legislation passed by Congress; Nixon, meanwhile, was mollified by a change that delayed implementation until 1976.
The Revenue Act of 1971 has always been something of a historical afterthought, at least for fiscal historians. In the broader context of Nixon’s presidency, it was overshadowed by the headline components of the Nixon Shock: the wage and price controls and the suspension of dollar-to-gold convertibility. To the extent that the act is remembered at all, it is most often for its campaign finance reforms.
But the 1971 act also deserves recognition as Nixon’s revenue swan song: It was the last important piece of tax legislation enacted during his presidency. Other issues would soon take precedence, and taxes would not rise again to the top of Washington’s agenda until Gerald Ford was in the White House.