[Congressional Record Volume 157, Number 88 (Monday, June 20, 2011)]
[Senate]
[Pages S3908-S3910]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
DEBT CEILING
Mr. KYL. Mr. President, as you know, there is a great deal of
discussion going on right now in different forums on whether to
increase our debt limit and, as a part of that, how we can reduce this
government's spending practices so that we won't have to keep extending
the debt ceiling in the future. Those conversations include a lot of
focus on reducing spending in the near term and finding ways to reform
some of the entitlement programs so that spending will also be reduced
over the long term because I think everyone agrees that the current way
we spend money--40 cents of every dollar has to be borrowed--is
literally going to result in bankruptcy if we don't bring it under
control.
There are those who say: Well, actually, the answer to the problem is
to increase revenues--meaning raise taxes. The problem with that is we
didn't get into this problem because we didn't tax enough; we got into
this problem because we have been spending too much.
The simplest way to think about it is that historically we spend
about 20 percent of the gross domestic product. Under the Obama
budgets, we are going to be spending--and we almost spend this much
now--25 percent of the gross domestic product, and that is a spending
increase that is not sustainable.
Even under the largest of deficits, when President Bush was
President, it was less than $\1/2\ trillion. But under the Obama
budget, it is $1.5 trillion almost exactly for every year for the last
3 years and on into the future. The result is that under this President
we will have doubled all of the debt this country has accumulated from
the time George Washington was President all the way through the time
George Bush was President. We will double that under the Obama
administration.
The problem is spending; it is not taxes. Evidence of that was
presented last Thursday in an op-ed piece in the Wall Street Journal.
At the conclusion of my remarks, I am going to ask unanimous consent to
have the article printed in the Record because I think it makes the
point. I will quote from it or at least discuss some of the arguments
in this piece right now.
It was put together by a Cato Institute senior fellow Alan Reynolds,
who has written on this subject in the past and is a real student of
the effect of tax rates on economic growth and on revenues for the
country. One of the points he discusses in this op-ed is what happens
when you raise tax rates, as some of our friends--particularly on the
other side of the aisle--want to do as part of this deficit reduction
exercise. Do you necessarily increase revenues if you raise tax rates?
What are the impacts on the economy? What happens, on the other hand,
if you are able to reduce tax rates?
Now, there is no plan on the table to actually reduce tax rates, but
I think the arguments he presents make it clear that lower rates do not
necessarily produce less revenue and, in fact, can have a salutary
impact on economic growth and therefore job creation, which is, of
course, what we are trying to be all about here.
He has studied tax rates for the last six decades, and here is some
of the factual information he comes out with. The conclusion is this:
Higher tax rates do not necessarily lead to more revenue. In fact,
recent history has often shown the opposite. Here are some specific
examples.
Back when the highest tax rate in this country was 91 percent--if you
can just think about that, a 91-percent tax rate. Why would anyone work
to make that last $1 when 91 cents of the $1 you earn goes to Uncle
Sam? That was the highest tax rate. The lowest tax rate was 20 percent.
Today, the lowest tax rate is zero and the next one is 10 percent and
then 15 percent and so on. So this was a much more progressive Tax
Code. Individual income tax revenues during that time were 7.7 percent
of the gross domestic product.
President Kennedy came along and proposed cutting both the highest
and the lowest rates. So they went from 91 down to 70 and from 20 down
to 14 percent. What happened to the 7.7-percent revenues? They rose to
8 percent of gross domestic product. So the rates were reduced, but the
revenue to the Treasury was increased.
What happened a few years later when that was done, when President
Reagan first cut the top rate from 70 percent down to 50 percent? Did
revenues fall? No. Revenues to the government increased to 8.3 percent
of the gross domestic product.
Third example, 1986, when the top rate was slashed again from 50
percent down to 28 percent, almost in half. You would think revenues
would decline. No. They remained almost exactly the same, from 8.3 to
8.1 percent.
So his research clearly demonstrates that the link between lower
rates and lower revenues is very weak, if not actually a converse
relationship. The relationship between higher taxes and economic
difficulty could not be more clear.
Let's talk about what happens when you have increases in the tax
rates. In the early 1990s, the top rate was increased to 31 percent--
which, by the way, is more comparable to about 35 percent in today's
dollars because of hidden taxes--the country fell into a recession and
revenues actually dropped to just 7.8 percent of GDP. So you think you
are going to raise more revenue and reduce the deficit by raising tax
rates? Wrong. We raised taxes, revenues actually dropped, and the
country went into a recession.
When the top two tax rates were raised later to 36 and 39.6 percent
and taxes on Social Security increased as a part of the Clinton tax
hikes, revenues again barely moved to 8 percent--so from 7.8 to 8
percent. The government actually collected more tax revenue when the
top rate was just 28 percent.
[[Page S3909]]
It is simply not true that you can raise tax rates and therefore get
more revenue to the Treasury and therefore reduce the debt and the
deficit. It is especially not true if you are only talking about doing
that for the very highest tax earners because they don't make enough to
produce the kind of revenue that would be required to reduce the
deficit that much.
To be sure, there are always fluctuations, and there is not a very
specific causal relationship in all cases between rates and revenues
collected. For example, during the technology bubble of the 1990s,
revenues rose above 9 percent. We were on a roll. People made more
money. The government made more money as a result. But, interestingly
enough, this was only after capital gains taxes were cut from 28
percent down to 20. There is almost an inverse relationship between the
capital gains tax rate and revenues collected. As that rate goes up,
less revenue is collected. As the rate comes down, more revenue is
collected because it is a tax on economic activity. The lower the tax,
the more economic activity you have and therefore the more the Federal
Government receives in revenues, even though the rate is lower.
Reynolds found a similar correlation between rates and revenues with
capital gains as he identified with ordinary income taxes.
Just a couple of other statistics. When the capital gains rate was 28
percent, revenues were 2.5 percent of the GDP. After the rate was cut
down to 20 percent, capital gains revenues rose to 4.6 percent of GDP.
So when you cut the tax rate, then the revenues almost doubled.
As I said, capital gains are the most sensitive to rate reductions or
rate increases of all our tax rates. Nonetheless, it is an impressive
figure to demonstrate that at least you don't want to be raising tax
rates even if you are not willing to reduce them.
In summary, after both ordinary income and capital gains tax rates
were cut to 35 and 15 percent respectively in 2003, individual income
tax revenues were 8.1 percent of GDP, which was higher than the period
when the ordinary income tax rate was 39.6 and the capital gains rate
was 28 percent. So almost no matter how you look at it, you can see
this relationship, and it is almost an inverse relationship.
Again, I am not claiming that all tax cuts pay for themselves or that
in all cases this is exactly the way it works out. But to assume we can
solve part of our problem by raising tax rates and especially raising
them on the people who are most able to move income around to avoid
paying taxes or minimize their tax rates and who are the most
susceptible to the capital gains rates and who are the people most able
to invest in business and therefore help to create jobs--to suggest
that increasing their tax rates is a good idea is obviously not true
based upon the research Mr. Reynolds has done.
The bottom line, lower tax rates do not necessarily mean less
revenue, higher rates do not always mean more revenue, and the facts
frequently point to the opposite.
There is obviously more to consider than just how much revenue will
be raised. Unfortunately, higher tax rates also have a very pernicious
effect on economic growth and job creation, and Reynolds' research in
this area is very clear as well. When surtaxes were imposed in our
economy back in 1969 and 1970, our economy fell into one of the deepest
recessions we have had until the one we are in right now.
During the bracket creep of the 1980 to 1981 period, when inflation
forced taxpayers to pay higher rates, until that was fixed later, the
economy again fell into a recession, and following the rate increases
of 1990, the economy fell into a recession. So it is pretty clear
higher taxes are the last thing you need to do or want to do during a
time of persistently high unemployment and a struggling economy, as we
have today. Yet, as I said, there are some Members of Congress and the
administration who have proposed raising tax rates as a way to address
the deficit.
I even read that an academic proposed a 70-percent rate. One witness
before the Senate Finance Committee, believe it or not, even suggested
that a tax rate of 90 percent would maximize revenue.
To show you how counterintuitive that is, let me just ask the
question. What two tax rates produce zero revenue? Well, the answer is
zero, of course, and 100 percent. If you are going to tax 100 percent
of what somebody makes, he is not going to bother to make the money. It
doesn't do him any good, and it doesn't do him much good if he only
gets to save a dime out of a dollar that he makes if the government
takes 90 percent. So it is not true that sticking the rich with a very
high tax rate is going to bring in more revenue to the government.
Those people don't have to make the money. They can shift it around so
they can minimize their tax burden. Eventually, what that does is put
an even greater burden on middle-income Americans who aren't that
wealthy, who can't move their money around, who have to take it and
spend it to support their families, send their kids to school or for
health costs or whatever it might be. That is why you cannot solve this
problem by raising taxes. You have to focus on the side where all the
growth has been, which is increased spending.
At the end of the day, the American people believe wasteful
Washington spending has to stop. That is why they are saying to many of
us, don't raise the debt ceiling, at least until you have made sure we
are not going to have to keep doing this in the future because spending
keeps going up. Let's have a downpayment on significant savings now.
Let's set the budget numbers for the next 10 years so they actually
represent a reduction in spending, not an increase. Let's have
entitlement reform that shows that, even after that 10 years, the
expenses will continue to, if not fall, at least rise less quickly so
our economic growth can manage any increase in costs. Let's do that in
such a way that we absolutely put constraints on Congress and the
President. We put ourselves in a straitjacket, so to speak, so we can't
create exceptions and waivers and get around it in other ways.
Unless we do those things, I don't think most of the people on my
side of the aisle are going to have an appetite for increasing the debt
ceiling. I know I am not. I am going to look at the historical evidence
that people such as Alan Reynolds point out to us, the evidence that
clearly shows that higher tax rates do not necessarily translate into
higher revenues; in fact, in many of the cases, it is precisely the
opposite. It is why, beyond the obvious economic costs, it is foolish
to propose higher rates as a solution to our fiscal crisis.
Mr. President, I ask unanimous consent to have printed in the Record
the Wall Street Journal op-ed I mentioned.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Wall Street Journal, June 16, 2011]
Why 70% Tax Rates Won't Work
(By Alan Reynolds)
The intelligentsia of the Democratic Party is growing
increasingly enthusiastic about raising the highest federal
income tax rates to 70% or more. Former Labor Secretary
Robert Reich took the lead in February, proposing on his blog
``a 70 percent marginal tax rate on the rich.'' After all, he
noted, ``between the late 1940s and 1980 America's highest
marginal rate averaged above 70 percent. Under Republican
President Dwight Eisenhower it was 91 percent. Not until the
1980s did Ronald Reagan slash it to 28 percent.''
That helped set the stage for Rep. Jan Schakowsky (D.,
Ill.) and nine other House members to introduce the Fairness
in Taxation Act in March. That bill would add five tax
brackets between 45% and 49% on incomes above $1 million and
tax capital gains and dividends at those same high rates. The
academic left of the Democratic Party finds this much too
timid, and would rather see income tax rates on the ``rich''
at Mr. Reich's suggested levels--or higher.
This new fascination with tax rates of 70% or more is
ostensibly intended to raise gobs of new revenue, so federal
spending could supposedly remain well above 24% of gross
domestic product (GDP) rather than be scaled back toward the
19% average of 1997-2007.
All this nostalgia about the good old days of 70% tax rates
makes it sound as though only the highest incomes would face
higher tax rates. In reality, there were a dozen tax rates
between 48% and 70% during the 1970s. Moreover--and this is
what Mr. Reich and his friends always fail to mention--the
individual income tax actually brought in less revenue when
the highest tax rate was 70% to 91% than it did when the
highest tax rate was 28%.
When the highest tax rate ranged from 91% to 92% (1951-63),
even the lowest rate was quite high--20% or 22%. As the
nearby chart shows, however, those super-high tax rates
[[Page S3910]]
at all income levels brought in revenue of only 7.7% of GDP,
according to U.S. budget historical data.
President John F. Kennedy's across-the-board tax cuts
reduced the lowest and highest tax rates to 14% and 70%
respectively after 1964, yet revenues (after excluding the
5%-10% surtaxes of 1969-70) rose to 8% of GDP. President
Reagan's across-the-board tax cuts further reduced the lowest
and highest tax rates to 11% and 50%, yet revenues rose again
to 8.3% of GDP. The 1986 tax reform slashed the top tax rate
to 28%, yet revenues dipped trivially to 8.1% of GDP.
What about those increases in top tax rates in 1990 and
1993? The top statutory rate was raised to 31% in 1991, but
it was really closer to 35% because exemptions and deductions
were phased-out as incomes increased. The economy quickly
slipped into recession--as it did during the surtaxes of
1969-70 and the ``bracket creep'' of 1980-81, which pushed
many middle-income families into higher tax brackets.
Revenues fell to 7.8% of GDP.
The 1993 law added two higher tax brackets and,
importantly, raised the taxable portion of Social Security
benefits to 85% from 50%. At just 8% of GDP, however,
individual income tax receipts were surprisingly low during
President Bill Clinton's first term.
The Internet/telecom boom of 1998-2000 was the only time
individual income tax revenues remained higher than 9% of GDP
for more than one year without the economy slipping into
recession (as it did when the tax topped 9% in 1969, 1981 and
2001).
But that was an unrepeatable windfall resulting from the
quintupling of Nasdaq stocks--combined with (1) the
proliferation of nonqualified stock options that have since
been thwarted by the Financial Accounting Standards Board,
and (2) the 1997 cut in the capital gains tax to 20%.
Realized capital gains rose to 4.6% of GDP from 1997 to
2002--up from 2.5% of GDP from 1987 to 1996 when the capital
gains tax was 28%.
Suppose the Congress let all of the Bush tax cuts expire in
2013, which is the current trajectory. That would bring us
back to the tax regime of 1993-96 when the individual income
tax brought in no more revenue (8% of GDP) than it did in
2006-08 (8.1% of GDP).
It is true that President Obama proposes raising the
capital gains tax to 23.8%, which could raise more revenue
than the 28% rate of 1993-96. But a 23.8% tax on capital
gains and dividends would nevertheless be high enough to
depress stock prices and related tax revenues.
Still, pundits cling to the myth that lower tax rates mean
lower revenues. ``You do probably get a modest boost to GDP
from tax cuts,'' concedes the Atlantic's Megan McCardle.
``But you also get falling tax revenue. It can't be said too
often--and there you are, I've said it again.''
Yet the chart nearby clearly shows that reductions in U.S.
marginal tax rates did not cause ``falling tax revenue.'' It
is not necessary to argue that tax rate reduction paid for
itself by increasing economic growth. Lowering top marginal
tax rates in stages from 91% to 28% paid for itself
regardless of what happened to GDP.
It is particularly remarkable that individual tax revenues
did not fall as a percentage of GDP because changes in tax
law, most notably those of 1986 and 2003, greatly expanded
refundable tax credits, personal exemptions and standard
deductions. As a result, the Joint Committee on Taxation
recently reported that 51% of Americans no longer pay federal
income tax.
Since the era of 70% tax rates, the U.S. income tax system
has become far more ``progressive.'' Congressional Budget
Office estimates show that from 1979 to 2007 average income
tax rates fell by 110% to minus 0.4% from 4.1% for the
second-poorest quintile of taxpayers. Average tax rates fell
by 56% for the middle quintile and 39% for the fourth, but
only 8% at the top. Despite these massive tax cuts for the
bottom 80%, overall federal revenues were the same 18.5%
share of GDP in 2007 as they were in 1979 and individual tax
revenues were nearly the same--8.7% of GDP in 1979 versus
8.4% in 2007.
In short, reductions in top tax rates under Presidents
Kennedy and Reagan, and reductions in capital gains tax rates
under Presidents Clinton and George W. Bush, not only ``paid
for themselves'' but also provided enough extra revenue to
finance negative income taxes for the bottom 40% and record-
low income taxes at middle incomes.
Mr. KYL. I note the absence of a quorum.
The PRESIDING OFFICER (Mr. Coons). The clerk will call the roll.
Mr. DURBIN. I ask that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DURBIN. Mr. President, I ask unanimous consent to speak as in
morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.
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