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Bruce Bartlett on the “Clinton tax challenge” for Republicans in the NYT:
Republicans are adamant that taxes on the ultra-wealthy must not rise to the level they were at during the Clinton administration, as President Obama favors, lest economic devastation result. But they have a problem – the 1990s were the most prosperous era in recent history. This requires Republicans to try to rewrite the economic history of that decade.
On August 10, 1993, President Bill Clinton signed the Omnibus Reconciliation Act of 1993, a law which did the following:
– created 36% and 39.6% income tax rates for individuals in the top 1.2% of the wage earners.
– created a 35% income tax rate for corporations
– repealed the cap on Medicare taxes
– raised transportation fuels taxes by 4.3 cents per gallon
– raised the taxable portion of Social Security benefits was raised.
I’m not a Republican, but I will take up the issue of explaining why the 1990s were prosperous despite the Clinton 1993 tax hikes. Some thoughts, in no particular order:
1. When Clinton signed that bill, the economy had been growing for 9 straight quarters, including by 3.4% annually over the previous six quarters. So the economy had built up a head of steam. Today’s economy, by contrast, rose less by less than 2% last year and may end up doing no better this this year or next.
2. The decade saw a big drop in oil prices, from $23 a barrel in 1991 to $12 in 1998, boosting real disposable incomes.
3. Government spending declined — meaning fewer resources as a share of the economy were being used unproductively by Washington — from 22.3% in 1991 to 18.2% in 2000.
4. There were really two 1990s. After the 1990-91 recession, the economy grew by an average of 3.1% a year from 1992 through 1995. That’s exactly how fast the economy grew from 1965-1991.
But from from 1996-2000, the economy grew by a spectacular 4.4% a year. This is the period that defines the decade in the mind of many people. Those years saw …
– a big tax cut, lowering the top capital gains tax rate to 20% from 28%;
– a big surge in private investment, particularly in the software and business equipment category which contributed a full point to GDP during those years. Did the Clinton tax hikes cause that or was it a combo of the Internet Bubble, Year 2000 preparations, the cap gains cut, and the beginning of a computer networking and communications revolution?
I guess I look at this issue holistically. The U.S economy entered the 1990s after undergoing a huge revamp in the 1980s: marginal tax rates were lowered from 70% to 28%, the inflation menace slayed, regulations reduced, and businesses got restructured and way more efficient. Then in the 1990s, government spending and debt were reduced, investment taxes cut, and a technological revolution kicked into high gear. Plus the Soviet Empire collapsed and the cloud of possible nuclear holocaust was lifted. Market capitalism was on the march. People were optimistic as heck about the future. Recall that The Matrix came out in 1999 and call the era “the peak” of human civilization.
And in the midst of all that, taxes were raised in 1993. So that means taxes should be raised now — and Obama wants to do so in the most economically harmful and inefficient ways — in a time of economic stagnation and pessimism? Not seeing it.