[Congressional Record Volume 141, Number 167 (Thursday, October 26, 1995)]
[Senate]
[Pages S15974-S15975]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  WHAT THE '93 TAX INCREASE REALLY DID

 Mr. KYL. Mr. President, the former Chairman of the President's 
Council of Economic Advisors, Martin Feldstein, just wrote an article 
for the Wall Street Journal about the 1993 tax increase.
  For many of us, it confirms what we have been saying all along: that 
tax rate increases and tax cuts change people's behavior. Just because 
the Government increases taxes doesn't mean that people will pay more 
to the Treasury. They will respond to the higher rates by earning less, 
producing less, and investing less.
  That is precisely what Mr. Feldstein found. He wrote:

       Because taxpayers responded to the sharply higher marginal 
     tax rates (imposed by President Clinton in 1993) by reducing 
     their taxable incomes, the Treasury lost two-thirds of the 
     extra revenue that would have been collected if taxpayers had 
     not changed their behavior. Moreover, while the Treasury 
     gained less than $6 billion in additional personal income tax 
     revenue, the distortions to taxpayers' behavior depressed 
     their real incomes by nearly $25 billion.

  Mr. President, tax rate increases are counterproductive. If the goal 
is to increase revenues to the Treasury, the better alternative is to 
cut tax rates.
  Lower tax rates stimulate the economy, resulting in more taxable 
income and transactions, and more revenue to the Treasury. The tax cuts 
of the early 1980's are a case in point. Revenues increased from $599.3 
billion in fiscal year 1981 to $990.7 billion in fiscal year 1989--up 
about 65 percent.
  The tax bill before the Senate today begins to undo some of the 
damage done by the 1993 tax increase that President Clinton now 
disavows. As Martin Feldstein points out, however, it does not go far 
enough. Congress should also revisit the issue next year to consider 
rolling back the personal tax rate increases that were part of the 
Clinton tax bill.
  I ask that the entire text of Mr. Feldstein's article be printed in 
the Record.
  The article follows:

                     [From The Wall Street Journal]

                 What the '93 Tax Increases Really Did

                         (By Martin Feldstein)

       President Clinton was right when he recently told business 
     groups in Virginia and Texas that he had raised taxes too 
     much in 1993, perhaps more so than he realizes. We now have 
     the first hard evidence on the effect of the Clinton tax rate 
     increases. The new data, published by the Internal Revenue 
     Service, show that the sharp jump in tax rates raised only 
     one-third as much revenue as the Clinton administration had 
     predicted.
       Because taxpayers responded to the sharply higher marginal 
     tax rates by reducing their taxable incomes, the Treasury 
     lost two-thirds of the extra revenue that would have been 
     collected if taxpayers had not changed their behavior. 
     Moreover, while the Treasury gained less than $6 billion in 
     additional personal income tax revenue, the distortions to 
     taxpayers' behavior depressed their real incomes by nearly 
     $25 billion.


                             how it happens

       To understand how taxpayer behavior could produce such a 
     large revenue shortfall, recall that the Clinton plan raised 
     the marginal personal income tax rate to 36% from 31% on 
     incomes between $140,000 ($115,000 for single taxpayers) and 
     $250,000, and to 39.6% on all incomes over $250,000. 
     Relatively small reductions in taxable income in response to 
     these sharply higher rates can eliminate most or all of the 
     additional tax revenue that would result with no behavioral 
     response.
       If a couple with $200,000 of taxable income reduces its 
     income by just 5% in response to the higher tax rate, the 
     Treasury loses more from the $10,000 decline in income 
     ($3,100 less revenue at 31%) than it gains from the higher 
     tax rate on the remaining $50,000 of income above the 
     $140,000 floor ($2,500 more revenue at 5%); the net effect is 
     that the Treasury collects $600 less than it would have if 
     there had been no tax rate increase.
       Similarly, a couple with $400,000 of taxable income would 
     pay $18,400 in extra taxes if its taxable income remained 
     unchanged. But if that couple responds to the nearly 30% 
     marginal tax rate increase by cutting its taxable income by 
     as little as 8%, the Treasury's revenue gain would fall 67% 
     to less than $6,000.
       How can taxpayers reduce their taxable incomes in this way? 
     Self-employed taxpayers, two-earner couples, and senior 
     executives can reduce their taxable earnings by a combination 
     of working fewer hours, taking more vacations, and shifting 
     compensation from taxable cash to untaxed fringe benefits. 
     Investors can shift from taxable bonds and high yield stocks 
     to tax exempt bonds and to stocks with lower dividends. 
     Individuals can increase tax deductible mortgage borrowing 
     and raise charitable contributions. (I ignore reduced 
     realizations of capital gains because the 1993 tax rate 
     changes did not raise the top capital gains rate above its 
     previous 28% level.)
       To evaluate the magnitude of the taxpayers' actual 
     responses, Daniel Feenberg at the National Bureau of Economic 
     Research (NBER) and I studied the published IRS estimates of 
     the 1992 and 1993 taxable incomes of high income taxpayers 
     (i.e., taxpayers with adjusted gross incomes over $200,000, 
     corresponding to about $140,000 of taxable income). We 
     compared the growth of such incomes with the corresponding 
     rise in taxable incomes for taxpayers with adjusted gross 
     incomes between $50,000 and $200,000. Since the latter group 
     did not experience a 1993 tax rate change, the increase of 
     their taxable incomes provides a basis for predicting how 
     taxable incomes would have increased in the high income group 
     if its members had not changed their behavior in response to 
     the higher post-1992 tax rates. We calculated this with the 
     help of the NBER's TAXSIM model, a computer analysis of more 
     than 100,000 random, anonymous tax returns provided by the 
     IRS.
       We concluded that the high income taxpayers reported 8.5% 
     less taxable income in 1993 than they would have if their tax 
     rates had not increased. This in turn reduced the additional 
     tax liabilities of the high income group to less than one-
     third of what they would have been if they had not changed 
     their behavior in response to the higher tax rates.
       This sensitivity of taxable income to marginal tax rates is 
     quantitatively similar to the magnitude of the response that 
     I found when I studied taxpayers' responses to the tax rate 
     cuts of 1986. It is noteworthy also that such a strong 
     response to the 1993 tax increases occurred within the first 
     year. It would not be surprising if the taxpayer responses 
     get larger as taxpayers have more time to adjust to the 
     higher tax rates by retiring earlier, by choosing less 
     demanding and less remunerative occupations, by buying larger 
     homes and second homes with new mortgage deductions, etc.
       The 1993 tax law also eliminated the $135,000 ceiling on 
     the wage and salary income subject to the 2.9% payroll tax 
     for Medicare. When this took effect in January 1994, it 
     raised the tax rate on earnings to 38.9% for taxpayers with 
     incomes between $140,000 and $250,000 and to 42.5% on incomes 
     above $250,000. Although we will have to wait until data are 
     available for 1994 to see the effect of that extra tax rate 
     rise, the evidence for 1993 suggests that taxpayers' 
     responses to the higher marginal tax rates would cut personal 
     income tax revenue by so much that the net additional revenue 
     for eliminating the ceiling on the payroll tax base would be 
     less than $1 billion.
       All of this stands in sharp contrast to the official 
     revenue estimates produced by the staffs of the Treasury and 
     of the Congressional Joint Committee on Taxation before the 
     1993 tax legislation was passed. Their estimates were based 
     on the self-imposed ``convention'' of ignoring the effects of 
     tax rate changes on the amount that people work and invest. 
     The combination of that obviously false assumption and a 
     gross underestimate of the other ways in which taxpayer 
     behavior reduces taxable income caused the revenue estimators 
     at the Treasury to conclude that taxpayer behavior would 
     reduce the additional tax revenue raised by the higher rates 
     by only 7%. In contrast, the actual experience shows a 
     revenue reduction that is nearly 10 times as large as the 
     Treasury staff assumed.
       This experience is directly relevant to the debate about 
     whether Congress should use ``dynamic'' revenue estimates 
     that take into account the effect of taxpayer behavior on tax 
     revenue. The 1993 experience shows that unless such behavior 
     is taken into account, the revenue estimates presented to 
     Congress can grossly overstate the revenue gains from higher 
     tax rates (and the revenue costs of lower tax rates). 
     Although the official revenue estimating staffs claim that 
     their estimates are dynamic because they take into account 
     some taxpayer behavior, the 1993 experience shows that as a 
     practical matter the official estimates are close to being 
     ``static'' no-behavioral-response estimates because they 
     explicitly ignore the effect of taxes on work effort and 
     grossly underestimate the magnitude of other taxpayer 
     responses.


                           current proposals

       In Congress had known in 1993 that raising top marginal tax 
     rates from 31% to more than 42% would raise less than $7 
     billion a year, including the payroll tax revenue as well as 
     the personal income tax revenue, it might not have been 
     possible for President Clinton to get the votes to pass his 
     tax increase.
       Which brings us back to President Clinton's own statement 
     (half-recanted the next day) that he raised taxes too much in 
     1993. Congress and the president will soon be negotiating 
     about the final shape of the 1995 tax package. The current 
     congressional tax proposals do nothing to repeal the very 
     harmful rate increases of 1993. Rolling back both the 
     personal tax rates and the Medicare payroll tax base to where 
     they were before 1993 would cost less than $7 billion a year 
     in revenue and would raise real national income by more than 
     $25 billion. Now that the evidence is in, Congress and the 
     president should agree to undo a bad mistake.  

[[Page S15975]]


                      OAK PARK'S 50TH ANNIVERSARY

   Mr. LEVIN. Mr. President, I rise today to commemorate the 
50th anniversary of the founding of the city of Oak Park, MI. The 
Family City is most proud of the fact that, despite its great growth 
over the past 50 years, it has remained primarily a residential 
community.
  Oak Park, MI, was established when voters approved the proposed City 
Charter on October 29, 1945, and decided that the city should remain a 
community of families and homes. Over the years, Oak Park residents 
have remained committed to keeping home as the center of their 
community. The residents of Oak Park have fought several times to keep 
large construction projects from changing the face and the feel of 
their community.
  Soon after its inception, Oak Park was dubbed ``The City with a 
Future.'' In the 1940's, Oak Park had about a thousand residents and a 
municipality of just over 5 square miles, which was originally 
developed in the 19th century from a swampy, densely wooded hunting 
ground. Oak Park grew quickly when many World War II veterans took 
advantage of GI loans to purchase houses and settle in the area. The 
city was identified as one of the fastest growing municipalities in the 
country during the 1950's. It was during this period that the local 
government structured the municipal services that so effectively serve 
its residents. During the 1960's, Oak Park had established itself as a 
mature city with a virtually unchanged population level.
  The year 1976 was a turning point in Oak Park's history. When it was 
named an official Bicentennial City. It is fitting that, during this 
celebration of the birth of our Nation and the ideals on which it was 
founded, Oak Park started the transition to the city it is today. Oak 
Park soon began welcoming newcomers from a variety of backgrounds and 
adopted a new motto: ``The Family City.'' The city also initiated a 
program which was dedicated to maintaining the cohesiveness of the 
community.
  Today, Oak Park is a friendly residential community which boasts a 
population representing over 70 ethnic groups. It celebrated its varied 
ethnic heritage this year with its 11th Annual International Ethnic 
Festival.
  The city of Oak Park represents the best of what America has to 
offer--a safe, residential community where all people are 
welcome.

                          ____________________