Taxes, economic growth and budget deficits

Another great New York Times Economix blog from Bruce Bartlett. Highly recommended! Bartlett, as you will recall, is one of the original supply side tax cutters. He served as senior staff to, among others, Jack Kemp, Ronald Reagan and Ron Paul. (By the way, his new book “The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take” is a terrific primer on federal taxes.)

Bartlett writing about a new report from the Congressional Budget Office makes clear that the Bush era tax cuts (kept in place by the Obama Administration) have been associated with economic decline and are a big reason for the huge federal budget deficit. That, in fact, it is the Clinton Administration with its tax increase that gave us not only economic growth and low unemployment but also federal budget surpluses. Turns out the story we are told over and over again about how higher taxes lead to economic decline and have nothing to do with government deficits is nonsense.

As Bartlett writes the key to the Clinton era success was the combination of a tax increase and control of federal spending. He writes:

The … surplus was primarily the result of two factors. First was a big tax increase in 1993 that every Republican in Congress voted against, saying that it would tank the economy. This belief was wrong. The economy boomed in 1994, growing 4.1 percent that year and strongly throughout the Clinton administration. The second major contributor to budget surpluses that emerged in 1998 was tough budget controls that were part of the 1990 and 1993 budget deals. The main one was a requirement that spending could not be increased or taxes cut unless offset by spending cuts or tax increases. This was known as Paygo, for pay as you go.

He contrasts that to what happened after the Bush tax cuts were enacted:

The 2001 tax cut did nothing to stimulate the economy, yet Republicans pushed for additional tax cuts in 2002, 2003, 2004, 2006 and 2008. The economy continued to languish even as the Treasury hemorrhaged revenue, which fell to 17.5 percent of the gross domestic product in 2008 from 20.6 percent in 2000. Republicans abolished Paygo in 2002, and spending rose to 20.7 percent of G.D.P. in 2008 from 18.2 percent in 2001. According to the C.B.O., by the end of the Bush administration, legislated tax cuts reduced revenues and increased the national debt by $1.6 trillion. Slower-than-expected growth further reduced revenues by $1.4 trillion. However, the Bush tax cuts continued through 2010, well into the Obama administration. These reduced revenues by another $369 billion, adding that much to the debt. Legislated tax cuts enacted by President Obama and Democrats in Congress reduced revenues by an additional $407 billion in 2009 and 2010.

Bartlett concludes: Putting all the numbers in the C.B.O. report together, we see that continuation of tax and budget policies and economic conditions in place at the end of the Clinton administration would have led to a cumulative budget surplus of $5.6 trillion through 2011 – enough to pay off the $5.6 trillion national debt at the end of 2000. … Republicans continue to insist that tax cuts are highly stimulative, often saying that they add nothing to the debt, when this is obviously ridiculous. Conversely, they are adamant that tax increases must not be part of any deficit-reduction package because they never reduce deficits and instead are spent. This is also ridiculous, as the experience of the Clinton administration clearly shows. (Emphasis added.) The new C.B.O. data confirm these facts.

How we have let the story that higher taxes destroy the economy and have nothing to do with budget deficits become conventional wisdom is beyond me. The Nineties were arguably the best economy in American history, certainly the best decade since World War II. And we not only had a great economy – one with labor shortages – but we also had a federal budget that was balanced long term.

The policy regime that led to those two outcomes that everyone in America wants was higher taxes – particularly on upper income Americans – and government spending constraint (not cuts). This formula gave us growth, budget surpluses and the ability to provide a decent safety net and make public investments that grow the economy long term in education, infrastructure and science and innovation. We need to get back to that formula as quickly as possible.

Print Friendly, PDF & Email

Social Links

Featured Video

Play Video

Newsletter Signup

* indicates required

Latest Reports

Recent Posts