SEVEN YEARS AGO Bill Clinton and the Democratic Congress passed what New York senator Pat Moynihan aptly described as “the largest tax increase in the history of the world.” It passed by just a single vote in the House and a single vote in the Senate. To their credit, no Republicans in Congress voted for the Clinton tax millstone. Even Bill Clinton confessed two years later that “I think I raised your taxes too much.” (You see, he really can tell the truth.)
The purpose of the tax hike back in 1993 was to eliminate the budget deficit. Economists will argue ad nauseam about how much those new taxes actually contributed to the balanced budget we finally achieved in 1998. For the record, our assessment is: not that much. The deficit was projected to remain well over $ 200 billion a year for as far as the eye could see two years after the Clinton plan was enacted. The deficit began to fall after Republicans took over Congress and abandoned the fiscal expansionary direction of Clintonomics.
In any case, what is unarguable is that the deficit has vanished and has been replaced with large and growing tax surpluses.
No one knows precisely how large those tax overpayments will be, but almost everyone agrees they’ll be very big. Over the next five years the budget forecasters in Washington expect more than $ 1 trillion of excess tax revenues. In the five years after that, the Congressional Budget Office crystal ball sees another $ 2 trillion of surplus tax collections. Those are conservative estimates. Economist Lawrence Kudlow has been the nation’s most accurate fiscal prognosticator of the last decade, and he estimates tax surpluses will be twice as large as the official forecast.
All of this is to say that the original rationale for the Clinton tax hike has vanished. But the tax hike hasn’t. Back in 1995, Republicans nervously wrung their hands and intimated that in principle they would want to repeal the Clinton tax hike, but mountainous deficits made the idea politically hazardous. Clinton, of course, strongly opposes repeal. He continues to claim that this would “bring back the big deficits of the 1980s.”
It turns out that just ain’t so. Senator Connie Mack of Florida, the chairman of the Joint Economic Committee, has the evidence in hand to counter that charge. Mack recently asked the Joint Tax Committee of Congress to estimate the revenue impact if we were to repeal the entire Clinton tax hike and restore fiscal normalcy in Washington. The congressional number crunchers have now told Senator Mack that the savings to taxpayers would be enormous — a little over $ 1 trillion over 10 years. That would increase the aftertax income per family in America by $ 9,500 over the next decade. Finally, a tax cut worthy of the name.
Clinton and Gore raised an assortment of taxes in 1993. The top personal income tax rate was raised from 31 percent to nearly 40 percent. The gas tax was raised by 4.3 cents a gallon. The corporate income tax was raised from 34 percent to 35 percent — affecting all of us as workers, shareholders, and customers. Payroll taxes were raised. Social Security taxes were raised for “wealthy” seniors — i.e. those earning more than $ 35,000 a year. Almost everyone in our society — from the shoe-shine man to Donald Trump — had dollars pried from his wallet.
The good news from Senator Mack’s report is that repealing this whole laundry list of taxes could be achieved without spilling one drop of new red ink. In fact, the entire Clinton-Gore tax hike could be repealed and we could still retire almost $ 2 trillion of debt, or about half of the national debt, over the next decade.
Naturally, the estimates by the Tax Committee fail to take into account the positive economic impact of liberating the U.S. economy from the depressive nature of all these taxes. The real burden of the Clinton tax was borne in the mid 1990s by all workers through lower output, investment, and wage growth than we would have otherwise had without the taxes. Yes, it is always guesswork to estimate “what would have happened” if some event had not occurred. But what we do know is that the economic expansion that began a year before Clinton entered office mysteriously stalled from 3.5 percent to about 2.5 percent in the two years after the 1993 tax hike. Repealing this tax hike would provide a prudent insurance policy against an abrupt halt to this economic expansion. Economists generally estimate that about one-third of the revenue loss from a tax rate reduction is typically recouped through the impact of higher growth.
For those who reject this supply-side theorizing, perhaps a real life example might offer some persuasion. Take a look at the impact of the 1997 cut in the capital gains rate from 28 percent to 20 percent. In the first three years of that tax “cut,” capital gains revenues have soared by some 50 percent. We economists call this the Laffer Curve effect. Lower rates, more revenue. Seldom does real life fit the theory so elegantly.
We would also note that America’s two primary economic rivals, Germany and Japan, both have followed the supply-side model by cutting tax rates in the past two years to jump-start their moribund economies. So far the policy seems to show signs of working as their economies begin to sputter back into gear. Although their tax rates are still higher than ours, America’s competitive advantage on taxes — with the important exception of capital gains taxes — has slipped in recent years. Repealing the Clinton-Gore tax hike would help recapture that comparative advantage in the global economy.
Bill Clinton would almost certainly veto any bill designed to roll back his economic legacy. So be it. He was wrong then. He is wrong now. The Clinton-Gore tax hike seven years ago was way too big. Bill Clinton admits it. Taxpayers know it. And certainly there’s no harm in reminding them eight months before an election.
Connie Mack’s report shows that the money is there to correct this historical mistake. But is there the political courage on Capitol Hill?
