Truth on Taxes

It is refreshing to read the economic analysis of Bruce Bartlett, a Republican who has worked for Presidents Reagan and George H.W. Bush as well as for Jack Kemp and Ron Paul. In a recent column (NYT, 8.5.12 “The Clinton Tax Challenge for Republicans”), Bartlett compares the results of George W. Bush’s tax cuts, which failed to promote economic growth, as he promised, and did not pay down the deficit, with Bill Clinton’s tax increases, which cut the deficit completely and also coincided with marked economic growth.

 Although President Clinton did not face an economic crisis of the magnitude of the one that Barack Obama found, still Mr. Clinton took office facing a $2.65 trillion federal deficit left by Ronald Reagan. Yet, according to a report by the Congressional Budget Office, “the federal budget deficit fell every year of the Clinton administration, from $290 billion in 1992 to $255 billion in 1993, $203 billion in 1994, $164 billion in 1995, $107 billion in 1996, and $22 billion in 1997.” Most Americans, except for the very youngest, can recall that when President Clinton left office, he handed his successor a federal budget surplus of $236 billion. What happened? That surplus, the nonpartisan C.B.O. reports, “was dissipated by huge tax cuts during the George W. Bush administration.” Compare the national nest egg Mr. Bush inherited to the global economic catastrophe he left his successor in 2008.

 The historical record, then, gives voters reason to ignore today’s partisans who claim without shame or evidence that cutting taxes would reduce the deficit and stimulate growth. Why would tax cuts work for Mitt Romney in a much more dire economic situation, when they led to a squandered federal surplus under George W. Bush?

Some commentators have argued that the cut in the capital gains tax was a major factor in President Clinton’s economic turnaround. But that is false. The capital gains tax was not lowered until 1997; by that time the Clinton administration had managed to reduce the deficit for five years in a row.

 But there is more. Clinton’s tax increase on the highest earners (from 31 percent to 39.6 percent, which President Obama proposes to restore) was part of a broader program that included federal spending cuts and a general tax hike, not limited to the wealthiest. The increased revenues were used to pay down the deficit even as the nation’s G.D.P. rose.

 That history provides ample reason to think that a tax hike might well succeed again. President Obama’s proposal to let the Bush tax cuts on the wealthy expire would be one step in the right direction. Those revenues could be used to pay down the deficit and to stimulate job creation, which is still too sluggish. Gradually, when the economy recovers and stabilizes, more spending cuts and a broader tax hike will also be necessary. That is the winning combination President Clinton implemented.


C Walter Mattingly
4 years 8 months ago
Some factors that the above editorial overlooks and possibly misconstrues.
As Ms Smith refers to Ronald Reagan's deficits, we should note that the last year of Reagan's administration experienced a deficit of about $160 billion. As Clinton entered office, the US was already in the early states of a recovery. It is quite common for revenues to increase and deficits to decrease naturally at such a stage. What is really unique about the Clinton economy is that the growth went on far past that initial stage. The first year of the increase to the top earning 1% Ms Smith mentions actually saw a decrease in income tax collected from that group, clearly an indication that the cited increase to top earners had a negative initial impact on revenue.  Although as Ms Smith notes the deficits began to decrease year over year, intially the predictable result of the recovery Clinton inherited, the actual revenues from the tax increase were fully 40% short of the administration's projections and a cause for concern that was a factor in the subsequent huge capital gains tax cut of 1997. But the great reduction in the deficit, and the first year of the Clinton administration that experienced a deficit lower than Reagan's last year, began in 1996, the year of fulfillment for Clinton's promise to "end welfare as we know it," which lowered the number of workers on welfare by 53%, or 7.5 million. That, coupled with the largest capital gains cut in recent history the following year, led to the actual budget surpluses of the last years of Clinton's tenure. Lowering taxes and cutting spending, including cuitting over 100,000 federal jobs and turning millions from welfare recipients into taxpaying citizens, extended the natural recovery from a recession in the early years into the longest continuous sustained growth the nation had experienced.

Canada, meanwhile, has worked that same program of cutting taxes and containing expenditures, but with far greater consistency, over two decades. The result was a halving of the nation's debt and regular budget surpluses, along with a healthy and growing economy. Their capital gains tax rate has just been lowered to under our current rate.  

If only we as a nation had such social and economic discipline. 
J Cosgrove
4 years 8 months ago
I am not sure the headline, ''Truth on Taxes'' is accurate.  How much truth is there in this OP?  We can debate it.  Clinton's tax rate hikes had little effect on the deficit.  That is one thing that is not true.  In 2005, two years after the Clinton tax increases, the OMB and CBO predicted $200 billion deficits for the next several years.  So if these tax hikes were the magic that has been suggested why this gloomy outlook two years after they were enacted.

But then something happened.  The Internet exploded and the US and world economy changed forever. What had a major effect on the deficit was a result of four things and none of them were the Clinton tax increases.  Clinton happened to be in the station when the train rolled in.  If Dole had been elected president in 1996 we would be talking about the Dole Revolution and that would have been nonsense too.  Here are the four things that contributed to the budget surpluses which by their nature were only temporary.  There was no way these surpluses could last.  If elected, Al Gore would have to explain why he blew all those Clinton surpluses.

1. The internet bubble changed the way business was conducted in the world but especially the United States.  There was unprecedented optimism as the country's economy expanded in response to this new phenomena.  There was a series of cartoons by Doonesbury which said that the stock capitalization of many of the new internet start ups were greater than the GDP of some countries.  People were predicting a DOW of 30,000.

2. There was a defense bonus as expenditures for defense dropped as a result of the implosion of the Soviet Union.  This was the so called ''peace dividend.''

3. There were restraints on the budget in general as the Republican Congress held spending down.  Here are the expenditures in 2005 dollars for the years of the Republican Congress.  In six years the expenditures only increased $150 billion.  We blow increases like that in a month now.

FY 1995 $1896.6
1996 $1906.8
1997 $1916.1
1998 $1958.8
1999 $1989.5
2000 $2040.6

And by the way, Clinton couldn't imagine the need for any more spending then what was in his last budget.

4. A dramatic increase in capital gains tax revenues after the rates were lowered in 1997.  This added nearly a $100 billion in additional tax revenues by 2000 over 1996, before the tax rates were reduced.

Thus the statement above,

''Some commentators have argued that the cut in the capital gains tax was a major factor in President Clinton’s economic turnaround. But that is false''

is not true.  There was no way that these capital gains revenues could continue as the NASDAQ fell from 5000 to 2000 in less than a year making most capital gains moot.  That is one of the things Bush inherited, this tremendous drop in the stock market.

If one analyzes the tax cuts of Bush in 2001 and 2003 it is easy to see tax revenue did not decrease but increased in 2004 through 2007.  There was a recession in 2001 that started before Bush took office and then there was 9/11.  Both of which dampened the economy for a couple years.  Here are income tax revenues for FY 2002-2007.

FY 2002 -2028.6
2003- 1901.1
2004- 1945.5
2005- 2153.6
2006- 2324.1
2007- 2414.1

Now exactly just what caused the increased tax revenues in that period can be debated but to say there were none or that the Bush tax cuts caused deficits is absurd.  What caused the deficits were the increases in military spending and probably too much other government spending in general.  Total compensation of federal employees has almost doubled since 2000 and a lot of that happened during Bush's tenure.

One last point on inceased taxes on the wealthy.  They will do two things and neither will help the middle class or the poor.  They will provide very little extra income and may in fact reduce tax revenues after a year or two as the rich adjust their behavior especially if the capital gains taxes are raised.  The second and most important thing is that the rich do not consume most of their income.  They invest it. 

Most of the investment in the future will come from the excess income of the high income earners and this is what will cause increased job creation in the future.  The upper middle class on down consume most of their income and save only a little.  So if we are interested in the future, then most investment in risky ventures will come from the ''rich'' and then the middle class and the poor will benefit by the innovation that is then produced.  Most of these risky investments fail, so people have to be encouraged by high returns in order to make these investments.  So by taxing these people more we are limiting the future of the poor and the middle class.  We have to find ways for them to invest more, not less.
Stanley Kopacz
4 years 8 months ago
The disparity between the rich and the rest of us is becoming greater and greater,  It would be interesting to compare the disparity in wealth in medieval times with ours.  Of course, in those times, wealth was land.  But it functioned to give power to an elite group over the majority.  Now it's money which has been given even more political power after the m'luds in the supreme court gave us Citizens United.  In our present trajectory, we seem to be headed for a new aristocracy.  We're already setting them apart with names like job creators.  And the reduction in estate taxes makes economic power more hereditary.  In a hundred years, we'll be either a social democracy or an aristocracy and if the latter, social mobility will have shut down decades before.
J Cosgrove
4 years 8 months ago
Mr. Kopacz, You should read, Coming Apart by Charles Murray.

It addresses a couple of your points. Namely, we are 1) becoming as a nation more stratified based on wealth and education and 2) the lower classes are losing those abilities/characteristics that allowed people in previous generations to rise up in income and status.  It is more than just education and wealth but a change in attitudes by a large segment of the population that affects their mobility.

Also there have been some studies that indicate that actual wealth has not become more concentrated in the last 50 years.  What we mainly see as wealth today is often investments in securities and as these increase, wealth will increase disproportionately to the rest of society and as they decrease their wealth will decrease disproportionately.  The greatest increase in so called wealth took place in the late 1990's as the stock market rose dramatically as the result of internet bubble.  It then decreased when the stock market dropped and rose again when it went up.  Not the same thing as our landed gentry of the past.
ed gleason
4 years 8 months ago
" What we mainly see as wealth today is often investments in securities and as these increase, wealth will increase disproportionately to the rest of society'
Gee Wiz ... DOW doubled since Obama took over in 2009.. JR will be voting for more?

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