The Truth About Clinton’s Tax Hikes And Budget Surpluses

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Today at the New Republic, Jonathan Cohn analyzes the latest iteration of Rep. Paul Ryan’s federal budget overhaul (which our very own Jon Green parsed yesterday). Under the humble title of “The Stunning Immorality of Paul Ryan’s Budget,” Cohn argues that Ryan’s plan would “take health insurance away from tens of millions of people, while effectively eliminating the federal government except for entitlements and defense spending.”

Cohn focuses mostly on federal healthcare spending, but not before staking some big claims about tax policy:

The idea that Ryan’s budget would promote a stronger economy (from which, in theory, it would gain even more tax revenue) is just as shaky. If lower taxes always produced higher growth, then the Bush years would have been a lot more prosperous and the Clinton years would have been a lot less. Yes, tax rates have real effects on the economy. But they are complicated and interact with other influences, in ways Ryan and his conservative backers never really acknowledge.

Tax cut skeptics frequently present the Clinton-Bush comparison, arguing that Clinton’s tax hikes preceded economic prosperity and federal surpluses while Bush’s cuts engendered weak growth and gaping deficits. In 1993, President Clinton raised the top marginal ordinary-income rate to 39.6 percent, three years after President H.W. Bush increased it to 31 percent from 28 percent. Supporters credit the budget surplus of the late 1990s to Clinton’s revenue increases, and note that these tax hikes don’t appear to have stymied the remarkable growth of the period. But how apt is this characterization?

The connection between Clinton’s tax increase, the federal surplus and economic growth is tenuous at best. Clinton and H.W. Bush did raise ordinary income taxes, but after President Reagan spent a decade slashing the top rate from 70 percent to 28 percent. Does anyone seriously believe this staggering transfer of capital from the Treasury’s coffers to the private markets in no way shaped the prosperity of the 1980s and 1990s? Clinton’s supporters point to the ascendant technology industry as evidence of the boom. But Microsoft, Apple, Oracle, Dell and a host of other innovative companies went public in the 1980s. Does Clinton’s tax policy truly deserve credit for their success, which was decades in the making?

Regardless, critics claim Clinton’s 1993 tax hike generated the federal surplus he turned over to his successor. Then what do they make of Clinton’s 1997 reduction in the capital gains tax rate from 28 percent to 20 percent? Since the surplus coincided with the NASDAQ’s surge, didn’t excess revenue come from capital gains rather than ordinary income, especially since Clinton’s 1993 tax hikes yielded just a third of the projected revenue?

And what effect did spending cuts (or at least cuts in spending growth) have on the federal surplus? To Dan Mitchell, the results are obvious:

Since the Clinton Administration’s own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.
Fortunately, there’s no need for an exhaustive investigation. The Historical Tables on OMB’s website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses.

Given this evidence, what seems the more likely source of Clinton’s surplus: slow spending growth and revenue windfalls from a boom decades in the making, or a 1993 tax increase that, as his own administration conceded, failed to bring in the promised revenue?

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