Wednesday, July 20, 2011

Debunking the Clinton Argument

"Clinton raised taxes, and we had a strong economy."  It's a point made frequently by those who are trying to argue the Conservative pillar that cutting taxes leads to stronger economies.  We all recall the 1990s and the economic boom that we all experienced.  Liberals want you to believe raising taxes not only caused the balanced budget but caused the economic boom.  Did Clinton's tax increases really cause it?  If it did, that would certainly be a tough blow to Conservative economic policy.  Unfortunately for Liberals, those pesky facts are going to get in the way.

As a reminder, the 1993 Clinton Tax Increases:

- Increased in the individual income tax rate to 36 percent and a 10 percent surcharge for the highest earners, thereby effectively creating a top rate of 39.6 percent.

- Repealed of the income cap on Medicare taxes. This provision made the 2.9 percent Medicare payroll tax apply to all wage income. Like the Social Security payroll tax base today, the Medicare tax base was capped at a certain level of wage income prior to 1993.

- 4.3 cent per gallon increase in transportation fuel taxes.

- Increased in the taxable portion of Social Security benefits.

- A permanent extension of the phase-out of personal exemptions and the phase-down of the deduction for itemized expenses.

- Raising the corporate income tax rate to 35 percent. (1)

The nature of the economy in 1993 is an important detail in the reactions to the tax increases.  One, the economy was in full recovery from the rather mild recession of 1990-91.  So it was an economy on the incline BEFORE the tax increases.  Furthermore, as the Heritage Foundation put it:

Tax policy aside, much in the context of the 1990s was conducive to prosperity. The end of the Cold War brought a new sense of hope and greater certainty to the global economy. The price of energy was astoundingly low, with oil prices dropping to about $11 per barrel and averaging under $20 per barrel compared to prices above $90 per barrel today. The Federal Reserve had finally succeeded in establishing a significant degree of price stability, with inflation averaging less than 2 percent during the Clinton Administration. And, of course, a tremendous set of new productivity-enhancing technologies involving information technologies and the World Wide Web burst on the scene. (1)

The Heritage Foundation proceeded to say that, in absence of a major hit to the economy (like a large tax increase, which the Clinton increase wasn' was a modest one), it would be hard NOT to have nice growth in the economy.  That's what we had, modest, but not spectacular growth in the economy from 1993-1996.  That included:

- The economy grew at an average annual rate of 3.2 percent in inflation-adjusted terms.

- Employment rose by 11.6 million jobs.

- Average real hourly wages rose a total of five cents per hour.

- Total market capitalization of the S&P 500 rose 78 percent in inflation-adjusted terms. (1)

This sort of growth is expected anyway from a country coming out of a recession.  It's a solid 240,000 jobs per month average.  Again, this can be expected from an economy recovering from a recession, especially a modest one like the 1990-91 recession.  In essence, prior to 1997, the Clinton Tax increases were not sufficient to offset the positive trends in the economy, thus there was a modest growth.

But Chris, wasn't the 90s economy a booming one?  In the LATE 90s it most certainly was a boom.  What happened then to cause those booms?  I'm so glad you asked.  In 1997, the Republicans passed a tax relief and deficit reduction package.  That package:

- Lowered the top capital gains tax rate from 28 percent to 20 percent

- Created a new $500 child tax credit

- Established the new Hope and Lifetime Learning tax credits to reduce the after-tax costs of higher education

- Phased in an increase in the estate tax exemption from $600,000 to $1 million

- Established Roth IRAs and increased the income limits for deductible IRAs

- Established education IRAs

- Conformed AMT depreciation lives to regular tax live
- Phased in a 15 cent-per-pack increase in the cigarette tax.

Yep, taxes were CUT.  Then, and only then, did we see the economy boom.  The Capital Gains cut lead to a huge boost in investment capital in businesses (that's business owners investing in their own businesses, for those of you from Palm Beach County, FL).  In 1995, there was approximately $8 Billion invested in venture capital.  In 1998, the first full year of the capital gains cut, there was a $28 Billion invested in venture capital. (1) Also, after that point, we saw real GDP growth increased from 3.2% to 4.2% and wages grew by more than 10 times the wage growth in the previous four years.  Yes, some of that boom was also due to the boom in internet industry.  No argument there.  That said, can anyone really claim that the Clinton Tax Hikes helped create the so-called dot com businesses?  Not legitimately, anyway.

Drawing upon historical evidence, I would argue that the Clinton tax increases may have hindered the growth a little, based on the old economic axiom "if you want less of something, tax it."  I would agree the increases weren't sufficient enough to do serious damage, since those rates, at least on the Federal level, were still under the damage line of the Laffer Curve.  However, the frequent claim of the Left that the Clinton Tax Increases lead to the booming economy is patently false.  It was Clinton and the Republican Congress' tax cuts in 1997 that lead to the boom.  Even in the Clinton economy, the score was Conservatism 1, Liberalism 0.


(1) Overall Source:  Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s Boom

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