During the earlier decades of the twentieth century, there had been some effort to use taxation to guide behavior, e.g., so-called “sin taxes” like those placed on tobacco. But these examples were a small part of tax policy, and a small part of tax revenue.
The big change came when the idea gained popularity that tax cuts could be used to stimulate consumer spending. Whether implemented as simple tax cuts or as “stimulus payments,” the government hoped to energize the economy as citizens spent the extra money. The government failed, however, to correspondingly cut spending, so the increased debt and deficit partially negated any stimulating effect.
David Stockman, who was the Director of the Office of Management and Budget from January 1981 to August 1985, explains:
Until then, conservatives had generally treated taxes as an element of balancing the expenditure and revenue accounts, not as an explicit tool of economic stimulus. All three postwar Republican presidents — Eisenhower, Nixon, and Ford — had even resorted to tax increases to eliminate red ink, albeit as a matter of last resort after spending-cut options had been exhausted.
While it is true that tax cuts sometimes stimulate the economy, and can even be used to increase revenue according to the Laffer curve, most leaders prior to 1975 thought of cutting taxes for that purpose. The stimulating effect was seen as an incidental byproduct of tax cuts, not the goal of tax cuts.
