On August 15, 1971, President Nixon unveiled a bundle of financial insurance policies to jump-start a sluggish financial system. His message featured a variety of proposals, some fairly tepid and standard, others fairly dramatic and controversial. It was the latter that gave rise to the identify later used to explain the speech: the Nixon Shock.

After the heady days of the mid-Nineteen Sixties, progress had slowed in the course of the second half of the last decade, ultimately turning unfavorable in 1970. Unemployment had risen from 3.5 p.c in November 1969 to six.1 p.c on the eve of Nixon’s speech. However client costs had continued their regular climb upward; from a low of 1.1 p.c in 1961, inflation had risen to three.0 p.c by 1966 and to five.84 p.c by 1970. By the point of Nixon’s tackle, it had cooled barely, however was nonetheless operating close to
close to
5 p.c.

All in all, the numbers instructed a worrisome story — one whose results Individuals felt of their on a regular basis lives. However in his televised tackle, Nixon promised to ship an answer. He supplied two proposals that have been particularly dramatic.

Controversial and Dramatic

The primary took purpose at inflation, probably the most persistent of the nation’s issues. “The time has come for decisive motion — motion that may break the vicious circle of spiraling costs and prices,” Nixon mentioned. “I’m right this moment ordering a freeze on all costs and wages all through america for a interval of 90 days.” Nixon additionally requested companies to freeze shareholder dividends for a similar interval.

The wage and value freeze was controversial, nevertheless it was additionally remarkably fashionable. As Gene Healy wrote for the Cato Institute in 2011: “After Nixon’s announcement, the markets rallied, the press swooned, and, regardless that his speech pre-​empted the favored western Bonanza, the folks liked it, too — 75 p.c backed the plan in polls.”

Nixon’s second bombshell concerned the convertibility of the U.S. greenback to gold — a coverage that most individuals took as a right and that functioned as a bedrock precept of the Bretton Woods system of mounted trade charges established after the tip of World Warfare II.

“I’ve directed [Treasury] Secretary Connally to droop quickly the convertibility of the greenback into gold or different reserve property,” Nixon instructed the nation, “besides in quantities and situations decided to be within the curiosity of financial stability and in one of the best pursuits of america.”

Underneath the Bretton Woods system, the values of worldwide currencies have been mounted in relation to the U.S. greenback, which was in flip valued in relation to gold at a set price of $35 per ounce. Nixon’s resolution to droop the convertibility of the greenback into gold started a course of that ultimately unraveled that system, resulting in a brand new system of floating trade charges.

Tax Proposals

Nixon’s New Financial Coverage, as his full bundle of insurance policies was identified, additionally contained a number of tax proposals, together with tax cuts for each companies and people — though the White Home and Congress would quickly be preventing over which group was getting a greater deal. Among the many most notable proposals:

• A brand new funding tax credit score. Nixon known as his proposed funding credit score “the strongest short-term incentive in our historical past to spend money on new equipment and tools.” He promised that it might “create new jobs for Individuals” by giving firms a ten p.c job improvement credit score for one 12 months, adopted by a 5 p.c credit score afterward. “This tax credit score for funding in new tools won’t solely generate new jobs; it’ll increase productiveness,” Nixon mentioned. “It would make our items extra aggressive within the years forward.”
• Repealing the excise tax on vehicles. Nixon known as on Congress to repeal the 7 p.c excise tax on new automobiles. The tax was already slated to vanish in 1982, however Nixon urged lawmakers to abolish it instantly. Eliminating the tax would translate right into a value discount of about $200 per car, Nixon mentioned, including that he would “insist that the American auto business cross this tax discount on to the practically 8 million clients who’re shopping for vehicles this 12 months.” Decrease automobile costs would assist stimulate the financial system as a complete, Nixon predicted: “Decrease costs will imply that extra folks will have the ability to afford new automobiles, and each further 100,000 automobiles bought means 25,000 new jobs.”
• Accelerating scheduled will increase in particular person earnings tax exemptions. Nixon proposed rushing up the scheduled will increase in private earnings tax exemptions, which have been already set to rise on January 1, 1973. If the will increase have been moved as much as January 1, 1972, taxpayers would see their exemptions develop by $50 a full 12 months early. “This enhance in client spending energy will present a powerful enhance to the financial system basically and to employment specifically,” Nixon predicted.

Nixon promised that his bundle of tax reductions would remodel the financial system. “The tax reductions I’m recommending, along with this broad upturn of the financial system which has taken place within the first half of this 12 months, will transfer us strongly ahead towards a purpose this nation has not reached since 1956, 15 years in the past,” he declared. “Prosperity with full employment in peacetime.”

Nixon was conscious, nonetheless, that tax cuts might add to inflationary pressures. To keep away from including gasoline to the fireplace, he paired his tax cuts with cuts in authorities spending, together with delays in scheduled pay will increase for federal workers. “Tax cuts to stimulate employment should be matched by spending cuts to restrain inflation,” he defined.

Enterprise vs. Particular person Cuts

On Capitol Hill, Nixon’s tax proposals received a typically favorable reception — a minimum of initially. Democrats, who managed each homes of Congress, shared Nixon’s fear concerning the financial system. Because the Joint Committee on Inside Income Taxation (JCIRT) summarized congressional pondering on the time:

The expansion of our gross nationwide product was small, unemployment was too excessive, and capital items expenditures have been hardly rising in any respect. Regardless of these components, which might often level towards deflation, the financial system was unable to shake the persistent inflationary development of costs. All this was compounded by our severe hostile stability of commerce and the accompanying disaster within the place of the greenback overseas.

Nixon couldn’t have mentioned it higher himself.

However Democrats nonetheless had considerations concerning the Nixon program. Basically, they thought it was too beneficiant to enterprise and too stingy with people — particularly these in decrease earnings brackets. To some extent, this was a query of equity. But it surely was additionally a matter of efficacy. Whereas the White Home was centered totally on stimulating enterprise funding, lawmakers have been a minimum of as anxious about boosting consumption.

The JCIRT summarized this traditional rigidity between supply-side and demand-side approaches to managing the financial system. “The Congress was guided not solely by the necessity to undertake a proposal which is truthful,” the panel mentioned in its clarification of the laws, “but additionally by the truth that the restoration of sound and vigorous financial situations required the stimulation of each consumption by people and funding by enterprise.”

Home Methods and Means Chair Wilbur Mills, D-Ark., was a key determine in congressional efforts to strike a stability. He initially greeted Nixon’s proposals with approval, telling reporters that the plan was “an excellent one.” However he hinted that Congress may develop a few of the president’s cuts, particularly those centered on people.

Democratic complaints about Nixon’s plan continued to develop after Congress left Washington for its summer time recess. “The majority of the criticism of the President’s proposals has come, thus far, from liberal Democrats,” The New York Instances reported, “who say, in a nutshell, that they supply an excessive amount of tax aid for enterprise and never sufficient for people.” The one significant aid measures directed at precise folks, these critics contended, have been the exemption will increase — and these have been already slated to extend the next 12 months anyway.

To strike a greater stability, Democratic leaders agreed to reduce a few of Nixon’s enterprise cuts and change them with extra beneficiant provisions for people. The act as handed by Congress and signed by the president in December 1971 mirrored these modifications.

Key Provisions of the Act

Congress started by reworking the funding tax credit score right into a flat 7 p.c fairly than accepting the administration’s proposal for a two-step credit score with 10 p.c the primary 12 months adopted by 5 p.c thereafter. Lawmakers additionally scaled again the generosity of the administration’s depreciation enhancements enacted earlier within the 12 months.

People received the early enhance of their exemptions that Nixon had requested; exemptions rose from $650 to $700 in 1971 and have been scheduled to rise by one other $50 in 1972. As well as, lawmakers elevated the minimal commonplace deduction, also called the low-income allowance, for these in decrease earnings brackets. “This latter motion gave assurance that the person earnings tax wouldn’t be imposed beneath the poverty stage,” defined the JCIRT.

Congress additionally added a particular deduction of as much as $400 per thirty days for little one care and home assist bills, obtainable to folks with kids underneath the age of 15 or folks with disabled dependents. The act additionally created a particular tax credit score for using welfare recipients, equal to twenty p.c of the wages paid.

Cash in Politics

The act additionally featured two tax provisions that touched on the generally contentious hyperlink between cash and politics. The primary provision was comparatively uncontroversial, however the second provoked a bitter struggle between the events.

In a bid to encourage donations to political campaigns, Congress created a tax credit score equal to one-half of a person’s annual political contributions, as much as a most credit score of $12.50 (or $25 for a joint return). Alternatively, taxpayers might declare an itemized deduction as much as a most of $50 (or $100 for joint returns). Lawmakers made the credit score or deduction obtainable for donations to candidates operating for any federal, state, or native workplace. It additionally utilized to donations to political committees.

The second money-in-politics provision involved public financing of presidential campaigns. Sen. John Pastore, D-R.I., supplied a ground modification permitting taxpayers to designate $1 of their tax legal responsibility for a presidential election marketing campaign fund, utilizing a brand new “checkoff” on their return. Cash from the fund can be given to presidential candidates who met sure qualifying situations and agreed to abide by spending limits.

Republicans bitterly opposed the Pastore modification, and the Senate spent 4 days debating it. President Nixon even threatened a veto over the problem. However the checkoff and its ensuing fund survived this frontal assault, making its method into the ultimate laws handed by Congress; Nixon, in the meantime, was mollified by a change that delayed implementation till 1976.

The Income Act of 1971 has at all times been one thing of a historic afterthought, a minimum of for fiscal historians. Within the broader context of Nixon’s presidency, it was overshadowed by the headline elements of the Nixon Shock: the wage and value controls and the suspension of dollar-to-gold convertibility. To the extent that the act is remembered in any respect, it’s most frequently for its marketing campaign finance reforms.

However the 1971 act additionally deserves recognition as Nixon’s income swan tune: It was the final necessary piece of tax laws enacted throughout his presidency. Different points would quickly take priority, and taxes wouldn’t rise once more to the highest of Washington’s agenda till Gerald Ford was within the White Home.