Taxes and Growth

[dogtowner]

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Takes a look at t.he reality as opposed to the myths surrounding the impacts in recent history of just how taxes plus and minus impacted things. As most conservatives will already know, Clintonesque parsing and framing only attempts to conceal the way our economy responds.

Setting the Tax Record Straight: Clinton Hikes Slowed Growth, Bush Cuts Promoted Recovery

Abstract: Despite evidence to the contrary, President Obama and his supporters insist that a tax increase will not impede economic recovery. They claim that the Clinton tax hikes spurred the boom of the 1990s and that the subsequent Bush tax cuts hurt the economy. Members of Congress must reject this faulty notion—and reject the President’s call for burdening Americans with higher taxes and an even slower economy.

President Barack Obama and his allies in Congress and elsewhere continue to press for tax increases, whether as part of a deal to raise the government’s debt ceiling, or for any other reason. Even though common sense would dictate not raising taxes in the face of a badly weakened economy and almost non-existent job growth, the President and his supporters argue that tax hikes will not imperil the still-nascent recovery because the economy grew during the 1990s after President Bill Clinton raised taxes. The inference being that today’s economy could also absorb the blow of tax hikes and grow despite them. They also argue the converse: that the tax cuts passed during President George W. Bush’s tenure slowed growth and cost jobs.

This cursory and errant analysis of recent history has serious implications for policymaking today. If Congress raises taxes based on the faulty notion that tax hikes have no ill effects on economic growth, it will impede the still-struggling recovery and keep millions of Americans on the unemployment rolls far too long.

Clinton Tax Hikes Slowed Growth

A favorite liberal argument is to attribute the economy’s strong performance during the 1990s to President Clinton’s economic policies, chief among which was a huge tax increase. Clinton signed his tax hike into law in September 1993, the same year he took office. It included an increase of the top marginal tax rate from 31 percent to 39.6 percent; repeal of the cap on the 2.9 percent Medicare tax, applying it to every dollar of income instead of being capped to levels of income like the Social Security tax; a 4.3-cent increase in the gas tax; an increase in the taxable portion of Social Security benefits; and a hike of the corporate income tax rate from 34 percent to 35 percent, among other tax increases.[1]

The economic defense of the Clinton tax hikes does not hold up against the historical facts. The economy did exhibit strong economic growth during the 1990s, but rapid growth did not occur soon after the tax hike—it came much later in the decade, when Congress cut taxes. After the 1993 tax hike, the economy actually slowed to a point below what one would expect, considering the once-in-a-generation favorable economic climate that existed at the time.

As for the overall economic recovery—that started well before President Clinton took office. In January 1993, the economy was in the 22nd month of expansion following the recession from July 1990 to March 1991.
In addition to coming into office in the midst of an economic expansion, Clinton also benefited from a very unusual confluence of events that created a remarkably favorable environment for rapid economic growth:

• The end of the Cold War brought a sigh of relief to the world and a powerful dose of growth-enhancing certainty to the global economy.
• The price of energy was astoundingly low, with oil prices dropping below $11 per barrel and averaging under $20 per barrel, versus $100 per barrel today.[2]
• The Federal Reserve had tamed inflation to an extent previously thought impossible, with inflation averaging 2 percent during the Clinton Administration.[3]
• The biggest wind at the economy’s back was, of course, a tremendous set of new productivity-enhancing information technologies and the explosion of the Internet as a powerful tool for commerce and communication, further increasing productivity.

With these factors clearing the way, the economy should have displayed spectacular and accelerating growth in the years immediately after Clinton entered the White House, but growth of that magnitude did not materialize until later in the decade.

From 1993 until 1997, the economy grew at a pedestrian 3.3 percent per year.[4] While solid, this growth was certainly not exceptional. During that same time, real wages declined, despite the perception that the 1990s were an era of unmitigated abundance.[5]

It was not until after a 1997 tax cut, passed by the Republican-led Congress—a tax cut President Clinton resisted but ultimately signed—that the spectacular growth kicked in. While small in revenue impact, the 1997 cuts included a reduction of the capital gains rate from 28 percent to 20 percent. This opened the capital floodgates necessary for entrepreneurs to develop, harness, and bring to market the wonders of the new information technologies.

Business investment skyrocketed after the tax cut,[6] and the economy grew at an annualized rate of 4.4 percent (33 percent faster than after the Clinton tax hike) from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time.

Altogether, how much worse did the economy perform because of the Clinton tax hike? The data from the period do not provide a clear answer. What is clear is that the economy performed well below reasonable expectations given the favorable conditions existing in the years after the tax hike—and took off after the often-forgotten tax cut.

Bush Tax Cuts Promoted Strong Growth

Liberals also like to argue that the Bush tax relief hurt the economy and cost jobs. Again, the evidence runs to the contrary.

Unlike President Clinton, who entered office with a strong economic wind at his back, President Bush came into office on the precipice of a recession caused by the bursting of the “dot-com” bubble. President Bush entered office in January 2001; the recession began in March.

In addition to the recession, the peaceful conditions President Clinton enjoyed reversed course. The terrorist attacks of 9/11 brought on the beginning of the war on terrorism. There was no growth-enhancing advancement comparable to the tech boom to further boost the economy; energy prices were creeping up. Instead of swimming with the current, the economy was now fighting squarely against it to achieve even modest growth.

Faced with this new reality, President Bush pushed for tax cuts to revive the economy and set it on a stronger foundation for economic growth.
In June 2001, President Bush signed into law the first wave of tax cuts. The relief included reductions of marginal income tax rates and tax relief for families, for example, doubling the child tax credit from $500 to $1,000. To reduce the budgetary impact, Congress phased in the tax cuts over several years.

Since the tax cuts were slow to go into effect, they were slow to help the economy. In fact, the economy continued to lose jobs after the tax cuts even though the recession officially ended in November 2001.

Realizing the error of its ways, in May 2003 Congress accelerated the tax cuts to make them effective immediately. In addition to reducing marginal income tax rates, Congress also lowered the tax rates on capital gains and dividends.

It was at this point that economic growth took off. From May 2003 until December 2007 (when the recession caused by the global financial meltdown occurred) the economy created 8.1 million jobs, or 145,000 a month. By comparison, after the beginning of the 2001 recession and before the 2003 tax cuts, the economy was losing 103,000 jobs a month.[7]

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