[Congressional Record Volume 141, Number 201 (Saturday, December 16, 1995)]
[Senate]
[Pages S18778-S18780]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                                TAX CUTS

  Mr. BENNETT. Mr. President, I was in the Chamber last night when some 
rather harsh words were spoken on both sides of the center aisle and I 
said a few words myself in an attempt to, first, calm the atmosphere 
and, second, lift the cloud of obfuscation that seems to have fallen 
over the debate, after which it fell to my lot to assume the chair.
  Some people think sitting in the chair is a great honor, and, of 
course, it is. But it is also a very good way of silencing one's voice, 
because when you are in the chair you are forbidden to speak or react 
or do anything other than to declare whether a quorum is or is not 
present, or inform errant Senators that they should please take their 
conversations to the Cloakroom--not the most edifying kinds of things 
to be able to say.
  So I take the opportunity that today's circumstance gives me to offer 
a few more words in the ongoing debate about the balanced budget, in 
response to some of the things that were said last night.
  I want to focus a little bit on the issue of the tax cuts. We were 
told last night that the most disgraceful part of the Republican 
attempt to balance the budget was that in our Balanced Budget Act we 
called for tax cuts. Disgraceful, we were told, when the public needs 
the money that you are going to cut in taxes.
  Behind that statement lies one of the great misconceptions of this 
body, and frankly this Government and the various groups that advise 
this Government. It gives me an opportunity to get on one of my soap 
boxes that I have been on before. But I warn the Senate there is no 
such thing as repetition. You can give the same speech again and again 
and again and it is always treated as if it were new and, indeed, maybe 
the repetition is necessary. So I will launch, once again, into an 
attempt to set the record clear about tax cuts and the way they are 
viewed in Government.
  We make the mistake in this Chamber and elsewhere of assuming that 
the Government's business is like a family income, where mother and dad 
sit around the kitchen table adding up the bills at the end of the 
month, scratch their heads, with very nervous looks on their faces, and 
say, ``We cannot make it. We must do one of two things. We must either 
increase our income by dad's getting a raise or mother working more 
hours at her part-time job, or somehow getting an inheritance from a 
rich uncle, or we must cut down our expenditures.''

  It is a two-dimensional problem. We must either increase revenues, or 
we must decrease expenses. That is all there is to it. And we are told 
around here that the Government has only two choices to balance the 
budget. We must either raise taxes or cut expenditures. And the analogy 
sounds wonderful, and it is easy to understand. Every one who sat 
around the kitchen table worrying about the bills identified the limit. 
There is only one problem though. It is not reality. It does not 
conform to the way the world really works.
  If I may switch the analogy, Mr. President, the Government is not 
like a family. The Government is like a business. And I have run some 
businesses. I have run some of them successfully, and I have run some 
of them unsuccessfully. Indeed, the lessons I learned from the business 
which failed under my hand were probably responsible for my ability to 
make some businesses succeed under my hand.
  The business is not a two-dimensional circumstance. It is three. 
There are three things you can do if your business is not making enough 
money to cover its monthly bills.
  First, yes. You can cut spending. You can cut your overhead. That 
corresponds with the family sitting around the table. You can say we do 
not need as many people as we have here. We do not need as fancy 
surroundings as we have rented. We can move into smaller quarters. You 
can do all kinds of things to cut your overhead and cut your expenses.
  Second, raise revenues. In business that is called raising prices. In 
Government it is called raising taxes. In business it is called raising 
prices, except every good businessman and businesswoman knows that 
raising prices is a very dicey way to try to increase your income 
because there are customers out there that may not like it. There are 
customers out there that may say, ``Oh. If you are going to raise the 
price on your widgets, I am going to buy widgets from somebody else.''
  I have increased the bottom line in businesses that I have run by 
raising prices. It is a wonderful way to do it. It is painless. If the 
customer will, indeed, pay the increased price. In business we have a 
phrase we call price sensitive. That is a fancy way for saying we do 
not dare raise the price on this product because, if we do, nobody will 
buy it. But, if you have a hot product, if you have something everybody 
wants, it is not particularly price sensitive and you can increase your 
income 10 percent by raising your prices 

[[Page S18779]]
10 percent. And that is clearly the easiest way to do it.
  Sometimes, however, Mr. President, businessmen know that they can 
increase their profits the third way, which is increase sales, cause 
the business to grow bigger than it is. And increasing sales sometimes 
comes from--wonder of wonders--increasing overhead. Oh, how can you do 
that? Well, you can buy an ad for one. You can put something on 
television telling people about your product. That is increasing your 
overhead but, if it increases your sales by significantly more than the 
overhead, it is the wise thing to do.
  You can increase your overhead by hiring additional salesmen who will 
go out and hawk your wares, and thereby cause the business to grow. Or, 
for many businessmen, the answer is cutting prices. Cutting prices--not 
increasing prices--many times is the road to success and profit.
  Look for just a moment, if you will, Mr. President, at the fastest 
growing portion of the economy which is the computer driven portion. 
What has happened to prices of computers? I will give you a rather 
graphic example.

  When I was once president--or actually chairman of the board, a fancy 
title; the company did not have any money; so they gave me a big title 
rather than a big salary--of a company that produced computers. We had 
two that we offered for sale. One, it was a dual-floppy disk computer. 
We sold it for $3,300. The other was a 10-megabyte hard disk computer 
which we sold for $30,000. We sold every one we could produce literally 
in a garage. Yes. This was one of those stories of a computer company 
that started in somebody's garage. We produced them in a garage, and 
every one we could produce we could sell immediately, there was enough 
demand for it.
  People would say, ``Gee. You are in the computer business. IBM 
dominates the computer business.'' With great foresight I said, ``IBM 
does not understand small computers. They only make mainframes. This is 
a business that will be reserved to us alone.''
  Today for under $2,000 you can buy a computer that has 40 megabytes 
of hard disk connected with it. A color monitor connected to it in a 
laptop makes the thing we produce--it was about the size of a good 
washer-dryer set with these 10 megabytes of hard disk, and it sold for 
$30,000, under everybody else. Now you can buy something that is so 
much better than that, and there is no comparison at all, for a 
fraction of the cost we used to charge.
  If the people in the computer industry had been Government-oriented 
in their pricing, they would have said, ``Gee. Mr. Bennett, you are not 
making any money with that $30,000 computer. The solution is to raise 
your prices'' when the folks at Apple down the street understood that 
the solution was to cut the prices.
  Well, what does this have to do with the debate we are having here? 
Simply this: That all of the figures we are throwing back and forth 
around this Chamber about cutting taxes $240 billion, raising taxes $28 
billion, and so on, are ignoring the fact that there are customers out 
there who will react to the new prices on Government service by 
changing their behavior just the way they are customers for products.
  An interesting article appeared in the Wall Street Journal about a 
month ago. I am going to dig it out and put it in the Record. Marty 
Feldstein, a respected economist, went back and did something we never 
do in Government. He analyzed the Clinton tax increase 3 years after it 
was put in place to see what happened. He came up with the most 
astounding fact, Mr. President. The Clinton tax increase yielded in 
revenue one-third of the amount of revenue that was projected at the 
time it was passed.
  We debated back and forth on this floor. And we were told again and 
again that we must have this tax increase to cut the deficit, and it 
will cut into the deficit x billion dollars. Now, 3 years later, the 
good economist Dr. Feldstein, has looked at it, and said, ``Do you know 
what? You raised the taxes x amount, and you got one-third x in 
revenue.''
  We never look at that around here. We never pay any attention to 
that. We are like the businessman who says, ``I will raise my prices, 
and my revenue will come in without any question,'' and then discovers 
that the customers do not buy it.
  Mr. President, I ask unanimous consent that the the article in the 
Wall Street Journal by Martin Feldstein be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

             [From The Wall Street Journal, Oct. 26, 1995]

      Board of Contributors: 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.
       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 a 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 
     realization 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 

[[Page S18780]]
     $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 from 
     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. The 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.
       If 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.

  Mr. BENNETT. I suggest to you, Mr. President, that we need to pay 
close attention to what happens when tax rates are cut. It is the same 
thing that happens to a well-run business when prices are selectively 
and intelligently cut on certain products. If we cut the tax rate on 
capital gains, which is where most of the heat is coming from on the 
other side of the aisle, I am willing to bet a fairly substantial 
amount of money that we will see Government revenue from capital gains 
go up and not down.
  Is not that what we are after? We want to balance the budget. We want 
more revenue, do we not? We ought to do that which will bring in more 
revenue. And the way to bring in more revenue is to cut prices on the 
products that are slow moving.
  I tell you, Mr. President. Ever since we raised prices on capital 
gains by increasing the capital gains rate, the Government revenue from 
capital gains has been going steadily down. And any decent business 
person will tell you we made a mistake with that price increase.
  We ought to cut the price back to where it was before, and people 
will start buying our widgets again. We ought to cut the capital gains 
tax rate back down to where it was before. I will tell you the figure 
that I will settle for, Mr. President. I will settle for the figure on 
capital gains proposed by John F. Kennedy, President of the United 
States. He wanted a capital gains rate lower than the one we are paying 
today and nobody accused him of trying to throw widows and orphans out 
into the street, or little children being driven away from their school 
lunches when John Kennedy proposed a cut in the capital gains tax 
rate. His cut was passed. And what happened when they cut prices on 
that particular governmental service? The revenue from capital gains 
went up.

  What is the objection? As nearly as I can tell, the only objection to 
the Government getting more money from people who have capital gains is 
that the people who have capital gains are supposedly the wealthy. I 
will not argue with whether they are the wealthy or not. We can do that 
at another time. And there are plenty of charts to indicate that that 
is not the case.
  The point I am making is this. If I am a businessman and I wish to 
increase my bottom line, I really do not ask whether or not the 
customers who are benefited from my cutting prices are rich or poor. I 
really do not care. All I want is enough money to keep my doors open. I 
do not think the Government ought to really care whether the people who 
benefit from a capital gains tax cut--in the rate--are rich or poor as 
long as the Government gets more money.
  I was not sent here by the voters of Utah to punish or reward. I was 
sent here to balance the budget, and one of the ways I balance the 
budget is to get more revenue to the Government. And one of the ways I 
get more revenue to the Government is to cut the prices on capital 
gains transactions so that more people will do more of them and the 
economy will grow and the Government will get more money.
  So I say to those who are hung up about tax cuts and tax increases 
and who we are hurting and who we are helping, will you change your 
focus just a minute and ask who you are here to represent and what your 
assignment is. Your assignment is to get the Government's fiscal 
affairs in order, and if that is done everybody benefits. And if in the 
process of getting more revenue into the coffers you happen to help 
somebody who probably does not need help in terms of his own personal 
financial circumstances, do not let that bother you. Go ahead, take his 
money anyway. Go ahead, balance the budget anyway, even if somebody who 
is rich now happens to benefit by the fact that you are balancing the 
budget and making life more secure for everybody else. Look the other 
way and take his money anyway. If we did that around here, I think we 
move toward solving the problem.
  I thank the Chair for his patience. I realize this is not the most 
stimulating conversation in the world because we are here, frankly, 
waiting on a group of negotiators to try to solve their problems. And 
the only comment I would give to them would be this one. You have made 
your point. You have shown how tough you are. You have shut the 
Government down. Everybody knows you are powerful. Will you please 
start to negotiate, having made your point, and let us get on with it.
  Mr. President, I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. WARNER. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Bennett). Without objection, it is so 
ordered.

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