Responding to Bruce Bartlett on the Clinton Tax Hikes and the 1990s Boom


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– repealed the cap on Medicare taxes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.

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  1. Profile Photo Inactive

    Additionally, that 35% corporate tax rate in the 90s was far more competitive internationally than that rate looks today after many OECD nations have significantly reduced their rates, was it not (Table II.1)?

    Appreciate you providing the context and keeping them honest, Jim.

    • #1
  2. Profile Photo Inactive

    I have a hunch (only a hunch) that the computerization of society is vastly underestimated, and reported economic numbers don’t account for it. Every business of any size computerized, added servers, programs, and many did it all over again to correct what they didn’t know in the first place. Add to that the fact that everyone thought they were going to make their fortune with a new internet business. There was a bubble, but most of it survived and prospered as life in the country changed. People now don’t have just a computer, but several. I live near the Microsoft campuses,  which are like small cities. People often said the time to sell the stock was when they took down the construction cranes. They still occupy a big chunk of every available office building.

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  3. Profile Photo Inactive

    Well done.  Perhaps just add that reducing government spending was largely done by reaping the Reagan peace dividend which allowed defense spending to fall from 6%-8% of GDP in the 80’s to around 3% in the 90’s. 

    There is much talk of what President Obama inherited.  What did President Clinton inherit?  A pretty sweet set of circumstances, most would probably agree. 

    Separately, but somewhat related, I’ve been toying with the hypothesis that the 1990’s may have been the most exceptional decade in history… no great wars, no cold war, technologies that were game changers (what we have today are largely a difference in degree, not the difference in kind that were commercialized in the 90’s), more wealth built than any other decade in history, more people moving to relative freedom than any time in history, and, of course, Milton Friedman was still alive (RIP… the 90’s were at least in part, a result of peoples adopting his ideas). 


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  4. Profile Photo Member

    I’ve always said that I’d gladly go back to the tax rates of the Clinton era, so long as we do the same with spending rates.


    • #4
  5. Profile Photo Inactive

    Speaking of inheriting things, Clinton inherited a major technology boom (newly powerful computers on every desk,) and a giant peace dividend on top of that. Preparing for nuclear armageddon was kind of expensive, and after Reagan, and Bush 41, we were able to cut back severely on that financial burden. If you were President through the 1990s, it was pretty hard to screw it up. Luck and history took over.

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  6. Profile Photo Member

    At the end of the 80’s the most expensive item in homes was generally the refrigerator, by the end of the decade a majority of people owned a personal computer, software to go with it, a cell phone and an paid for an internet connection and a cell service to support it. In business the new products services and support purchases were even more dramatic. Entirely new budget items in personal and business spending  entered the equation, representing huge increases in personal and business spending. I haven’t tracked the money supply figures from ’94 to the end of the decade but my guess is that personal savings decreased while debt increased dramatically. 

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  7. Profile Photo Member

    Good job.  I would add one more observation.  We WOULDN’T be going back to the Clinton era tax rates.   Obamacare already hikes FICA taxes (for higher incomes) and taxes on investment income.  A 39.6% tax would be on top of these NEW taxes that DIDN’T EXIST during the Clinton admin.

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  8. Profile Photo Coolidge


    – Peace Dividend

    – Gulf War ended

    – Cellular Radio Spectrum auctioned for $34 Billion (?)

    – Savings and Load bailout ended

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  9. Profile Photo Editor
    Mark Belling Fan: I’ve always said that I’d gladly go back to the tax rates of the Clinton era, so long as we do the same with spending rates.

    Deal? · 3 hours ago

    Exactly.  There are times I want to give up on the big change issues, and just demand that Congress pass the 1998 budget.

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  10. Profile Photo Member

    I’d also include Welfare Reform which Clinton signed – now being gutted.

    It’s important to have facts like this at the ready. The Left always brings up the 90’s.

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  11. Profile Photo Inactive

    FL Booth – good call on the credit explosion starting.  I’m old enough to remember a time when you saved for a purchase and kept a savings account handy for “just in case”.  Make no payments for two years, interest free?  Who can resist?

    The drop in energy costs was also huge.  US oil production peaked in the early 70’s, and the country’s thirst kept building.  King oil literally keeps the economy’s wheels turning, and they were spinning quite fast in the 90’s.

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  12. Profile Photo Inactive

    If raising taxes won’t damage the economy then let’s raises taxes on all tax rates by rescinding ALL Bush tax cuts. The Bush tax cuts were not only for the wealthy.

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  13. Profile Photo Member

    Great points all around. The world was a very different place and the US was (largely) uniquely suited to experience a great boom.  Some of the magic can be re-created– lower spending, sensible reform of welfare and other entitlements spring to mind. But some of the magic only comes once– the fascination with the internet and more liberalized free-trade agreements aren’t rabbits we are likely to pull out of the hat again. 

    Rob Long mentioned passing the 1998 budget. I wish! Judging by the rhetoric coming from the Democrats, passing a 2004 budget would be the equivalent of sending the country back to the stone age and sentencing our grandparents to die in the street. 

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  14. Profile Photo Coolidge

    The article is clear evidence that Bartlett went to the same School of Economic Illiterates that Barry went to but won’t release his transcripts from, because he’s brilliant.

    If I were to cherry-pick 8 years of policy points, I’d say, well, wasn’t Barry against same-sex marriage in 2008?  So I guess in 2012 he’ll be for it again?

    The fact is the Clinton-era tax cuts were largely enacted due to Congress, not Clinton, and he went along with them because he couldn’t fight the majority in the House, and he had impeachment worries.  He wins either way, here, because if the economy booms, he takes credit (and he does).  If it tanks, it’s partisanship keeping him from saving us all from our economic selves through Magical Federal Spending.

    It would be nice if Bartlett presented the full truth, instead of the comfortable parts that only work for him.  Nothing exists in a vacuum.  Well, except vacuum bags.

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