[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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