[Congressional Record Volume 140, Number 111 (Thursday, August 11, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 11, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
      ONE YEAR LATER: HOW THE CLINTON TAX HIKE IS HARMING AMERICA

                                 ______


                            HON. JIM SAXTON

                             of new jersey

                    in the house of representatives

                       Thursday, August 11, 1994

  Mr. SAXON. Mr. Speaker, I commend the following article to my 
colleagues:

       [From the Heritage Foundation Backgrounder, Aug. 10, 1994]

      One Year Later: How the Clinton Tax Hike Is Harming America

  (By Daniel J. Mitchell, McKenna Senior Fellow in Political Economy)


                              introduction

       This week marks the first anniversary of 1993's record tax 
     hike and the ill effects already are becoming apparent. The 
     Clinton Administration's own numbers show that economic 
     growth and job creation remain considerably below levels 
     normally found at this stage in a business cycle. The White 
     House figures also reveal that if any deficit reduction does 
     occur, it will be only temporary and largely unrelated to the 
     President's economic policy. Worst of all, the 
     Administration's budget numbers confirm that government 
     spending remains out of control, with rising deficits in 
     future years entirely due to the unchecked growth of domestic 
     spending programs.
       These dismal results should not be surprising. Other 
     Presidents who have followed high-tax policies also have 
     experienced disappointing economic performances as a result. 
     Large payroll tax increases and bracket creep during the 
     Carter Administration, for instance, helped stifle a robust 
     economy and create the phenomenon known as stagflation. 
     George Bush also inherited a strong economy, but his 
     acquiescence to a large tax increase in 1990, combined with 
     other significant reversals of his predecessor's policies, 
     helped put an end to the longest peacetime expansion in 
     America's history.


                         deja vu all over again

       The Clinton Administration insists that its tax plan is 
     working and that history will not repeat itself. 
     Unfortunately, the rosy picture being painted by the White 
     House falls apart upon closer examination. Consider the 
     following claims:
       Claim No. 1: The Administration's economic policy has 
     restored economic growth.
       Reality: This assertion ignores the fact that the recession 
     ended in the spring of 1991. And even though President 
     Clinton's tax plan did impose retroactive tax increases on 
     small businesses, investors, upper-income individuals, and 
     the estates of dead Americans, even the White House is hard-
     pressed to argue that a tax increase beginning January 1, 
     1993, caused a recession to end nearly two years later. The 
     Administration can legitimately claim that 1991 should not 
     count as a recovery because the economy experienced almost no 
     growth, expanding by less than three-tenths of one percent 
     during the year. The same cannot be said for 1992, however, 
     since the economy expanded at a 3.9 percent clip. Growth in 
     1993, the year of the Clinton tax increase, slipped back to 
     3.1 percent and the Administration's new projections show 
     only 3.0 percent growth in 1994. As such, the best the 
     Administration can claim is that last year's budget deal has 
     not yet caused the economy's performance to slow down much 
     compared to the growth levels President Clinton inherited.
       The real story, however, is that the recovery under both 
     Bush and Clinton has been woefully inadequate. In the post-
     World War II period, the U.S. economy traditionally has 
     experienced strong recoveries after an economic downturn, 
     with real growth averaging 5.34 percent for the three years 
     following a recession's end. But the economy's performance 
     this time has fallen far short of past recoveries, with 
     growth averaging only 2.94 percent in the last three years. 
     In other words, economic growth has been barely half as 
     strong as that normally experienced at this stage of a 
     business cycle. Average growth during this expansion has not 
     even reached the average of 3.1 percent for post-World War II 
     era--a figure which includes recession years.
       Instead of taking credit for ending the recession and 
     restoring economic growth, the Administration should be 
     trying to explain why the economy's performance has been so 
     weak. The reason for the poor growth figures, of course, is 
     that the White House is pursuing policies similar to those 
     that helped cause the recession in the first place. 
     Presidents Bush and Clinton both raised taxes. They both 
     increased government spending and they both increased the 
     burden of regulation and imposed costly mandates. As a 
     result, the economic downturn and subsequent weak recovery 
     should not come as a surprise. Policies which raise the cost 
     of productive economic activity inevitably result in less job 
     creation, lower savings, and reduced investment.
       Claim No. 2: The Administration's economic policy has 
     helped create new jobs.
       Reality: As is the case with economic growth, job creation 
     has been unusually weak during this expansion. If the current 
     expansion were producing an average number of jobs for a 
     recovery, total employment would have jumped by 11.79 percent 
     since the recession ended. But with tax increases and new 
     regulations raising the cost of hiring new workers (not to 
     mention the threat of an employer mandate in health reform), 
     total employment has increased by only 3.19 percent in the 
     last three years. Thus, while the White House likes to boast 
     that more jobs have been created to date during the Clinton 
     years than were created during the entire Bush 
     Administration, officials should instead be trying to explain 
     why the nearly identical economic policies of the two 
     Administrations have caused the rate of job creation in this 
     recovery to be less than one-third the usual rate at this 
     stage of a business cycle. This poor performance means 
     millions of Americans are unemployed today who would have 
     been working during an average recovery.
       Claim No. 3: The Administration's fiscal policy is bringing 
     down the deficit.
       Reality: Projected short-term reductions in the budget 
     deficit are largely unrelated to the President's policies. If 
     final figures bear out the Administration's estimates, the 
     three-year decline in government borrowing will be the result 
     of three factors. First and foremost, the deficit is falling 
     because the economy has finally climbed out of the recession, 
     albeit slowly. And even though the expansion is very tepid by 
     historical standards, incomes have risen slightly, some jobs 
     have been created, and corporate profits have staged a mild 
     recovery. All these factors mean the government collects more 
     tax revenue. The expansion also has caused a slight decline 
     in how fast some government programs, such as unemployment 
     insurance and food stamps, are growing. But as discussed 
     earlier, the economy is growing much slower than normal. As 
     such, the White House's economic policies actually are 
     causing the deficit to be higher than it would be if normal 
     economic conditions applied.
       The second reason for projected lower deficits is the cost 
     shift for the bailout of the deposit insurance system. The 
     large one-time costs of the savings and loan (S&L) deposit 
     insurance bailout artificially swelled the deficit between 
     1989 and 1992, adding $149 billion to the national debt in 
     that four-year period. The government now is selling off the 
     assets of seized S&Ls, however, and this is expected to 
     generate $60.3 billion of revenue for the government between 
     1993 and 1997. This huge shift, from a big budget expense to 
     a significant revenue source, lowers the reported budget 
     deficit. Bill Clinton had the good fortune to capture the 
     White House just as the shift took place, but it certainly is 
     not due to his policies. More important, it clearly has no 
     impact on the long-term deficit.
       The third reason the budget deficit is falling, and the one 
     reason the Administration can take credit for, is the large 
     reduction in defense spending. The Pentagon's budget is 
     expected to go down from $292.4 billion in 1993 to $257 
     billion in 1997, a decline of $35.4 billion. With the 
     Administration's foreign policy in disarray, these sharp cuts 
     may not be wise policy, but they do contribute to deficit 
     reduction.
       Claim No. 4: The Administration's tax bill has produced low 
     interest rates.
       Reality: Interest rates actually have been rising steadily 
     ever since the Administration's budget package was approved. 
     As indicated in Chart 3, interest rates began a steady 
     decline in 1989. This trend came to a halt, however, with the 
     enactment of the President's budget package. To be fair, the 
     increase in interest rates following adoption of the tax 
     increase has very little to do with fiscal policy and is 
     related more to fears in financial markets of future 
     inflation. Nonetheless, the White House can hardly claim that 
     its fiscal policy is resulting in lower interest rates when 
     rates actually have been rising.


                             the real story

       The White House has been trying to convince voters that 
     last year's tax increase is working. But, every claim made by 
     the Administration proves false upon closer scrutiny. Yet the 
     problem is not merely the lack of good news on the 
     consequences of 1993's record tax hike. What is of greatest 
     concern is that, as has been the case with previous 
     Administrations steering through large tax increases (such as 
     those of Hoover, Carter, and Bush), the Clinton tax hike is 
     imposing heavy costs upon the economy. Most notably:
       Rising budget deficits: According to the Administration's 
     own forecast, the budget deficit resumes its upward climb in 
     1996. The Congressional Budget Office, estimates that budget 
     deficits will swell to more than $360 billion by the year 
     2004.
       Surging domestic spending: As Chart 4 shows, the reason for 
     rising deficits is the alarming growth of domestic spending 
     programs. These programs, which are rising 78 percent faster 
     than needed to keep pace with inflation, are projected to 
     increase by a total of $229 billion over the four years of 
     the Clinton Administration. Significantly, if spending for 
     these programs simply held to the rate of inflation beginning 
     in 1995, the five-year savings would be more than $367 
     billion and the budget deficit would fall to $70.1 billion by 
     1999.
       Soak the rich tax hike backfiring: The lion's share of new 
     taxes in last year's tax package is supposed to come from 
     increased income taxes on small businesses, savers, 
     investors, and the well-to-do. Critics of the proposal 
     pointed out at the time that higher tax rates would 
     discourage productive economic activity and could actually 
     cause tax revenue to be lower than it would be if taxes were 
     not boosted. Known as the supply-side effect, this revenue 
     shortfall results when taxpayers reduce their work effort, 
     change their behavior, shift their investments, or take other 
     steps to protect their earnings from excessive taxation. As a 
     result, projects of tax revenues based on models which assume 
     taxpayers are oblivious to changes in the tax code almost 
     always will be grossly optimistic. This effect was seen after 
     the 1990 tax increase. Compared with projections made before 
     the tax increase was approved, the 1990 deal actually caused 
     tax revenues to fall by more than $3 for every $1 the 1990 
     tax bill was supposed to raise.
       Since the Clinton economic program is so similar to that 
     enacted during the Bush Administration, it should come as no 
     surprise that history seems to be repeating itself. According 
     to the Treasury Department, personal income tax revenues are 
     growing slower than other sources of tax revenue this fiscal 
     year. Nine months into the fiscal year, personal income tax 
     revenues are only 7.2 percent above their level at this point 
     last year. Tax revenues from other sources, by contrast, are 
     coming in at 11.2 percent above last year's levels. Revenues 
     from the tax that was raised the most have been growing far 
     slower than revenues from tax sources which were increased by 
     lesser amounts or not at all. The gap between personal income 
     taxes and other taxes is concrete evidence that ``soaking the 
     rich'' simply does not work. What makes these numbers 
     particularly significant is that some of the income tax 
     revenue came from the retroactive tax increase, which is one 
     tax increase that avoids the supply-side effect since it 
     raised rates on income that was already earned.
       The Administration should have anticipated that higher 
     income tax rates would be associated with slower income tax 
     collections. In the 1980s, when tax rates were slashed, 
     income tax collections soared, and the share of taxes paid by 
     the rich rose.
       Out of step with world trends: In an increasingly global 
     economy, changes in domestic policies can have a significant 
     impact on international competitiveness. During the 1980s, 
     policy makers in the U.S. understood and took advantage of 
     this phenomenon, cutting tax rates and encouraging a surge in 
     job-creating foreign investment in America. In recent years, 
     other countries have followed the U.S. example, lowering 
     their tax rates, oftentimes dramatically. Tragically, U.S. 
     politicians seem to have forgotten the lessons of the 1980s. 
     As seen in Chart 6, the United States has been raising tax 
     rates during a period when most other nations are doing just 
     the opposite.


                               conclusion

       Policies that did not work for Herbert Hoover, Jimmy 
     Carter, and George Bush are not working any better for Bill 
     Clinton. The economy's weak performance, the dismal job 
     creation numbers, and projections of higher spending and 
     deficits are the inevitable results of a fiscal policy based 
     on this flawed model. Critics maintained that the 1993 tax 
     hike would harm the prospects for a solid recovery, not 
     enhance them. They are already being proved correct.