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The Spectacle Blog
Ezra Klein brandishes a graph comparing employment and economic growth under the Clinton tax increase versus the Bush tax cuts. He says it refutes the Republican argument that “you can’t reconcile higher taxes and growth.” I’ll acknowledge that it proves tax increases generally and the Clinton tax rates specifically can be compatible with growth. I’ll even concede many Republicans predicted the opposite before the Clinton tax increase passed.
But the graph does not prove that, all other things being equal, tax increases are good for growth. Nor does it necessarily tell us what would happen if we suddenly imposed Clinton tax rates in this more fragile economy. Nor does it paint a complete picture. The jobs and GDP growth rates after the Reagan tax cuts were fully phased in would certainly compare favorably to the same numbers under Bush 43, even though the Reagan rates were lower. Does Klein therefore want a 28 percent top income tax rate? In fact, Bush did not return to the pre-Clinton top marginal income tax rate.
There are other complicating factors — the economy slowed after a Clinton-like increase in the top marginal tax rate under Bush 41, Clinton signed capital-gains and other tax cuts, none of the tax increases of tax cuts in question are of the same magnitude as the Reagan tax cuts, etc. But it seems to me there are two factors that complicate this most of all.
First, there are relatively few liberals arguing, as they did in the 1990s, that “bringing down the deficit through a balanced mix of tax increases and spending cuts” is the best way to stimulate economic growth. Second, funding our existing spending commitments after demographic changes and health care inflation will require bigger tax increases than just returning to the Clinton tax rates.
So sure, the Clinton tax increases weren’t big enough to stifle the dot-com boom. But that doesn’t ean the dot-com boom would magically reappear if we went back to the Clinton tax rates and it doesn’t mean that even bigger tax increases imposed on a weaker economy will promote growth.
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More Blog Posts by W. James Antle, III
http://spectator.org/blog/2011/05/18/grappling-with-that-anti-tax-c
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Irish22| 5.18.11 @ 3:56PM
Trying to prove cause and effect in economics is virtually impossible. We can only look at history and attempt to infer correlations between events. We do know that, "all government spending is a tax." We also know that taxes raise prices, and thereby decrease markets. Finally, the redistribution of income has a negative impact on the economy, because it decreases incentives to work, and because it is based on the forcible taking of one person's property to give it to another. At a certain point I abandon economics and appeal to morality.
JohnD| 5.18.11 @ 4:03PM
Much of the pre 2000 economic growth was funded by ownership of phony, overvalued internet stocks. I remember someone telling me in 1999, when amazon stock was skyrocketing before they made their first dollar of profit, "the fundamentals do not matter any more."
My reply: "The fundamentals always matter." I was proven right and the bubble burst in 2000.
That said, you could argue the growth during the 2003-2008 period was financed by home equity cash-out re-fi's on inflated houses. Again, the fundamentals intervened and that bubble burst too.
But back to Clinton, his tax increases had to have hurt the economy, but the internet revolution, the cut in capital gains, and the Republican congress balancing the budget all helped too.
Thom| 5.18.11 @ 6:01PM
To add to the point JohnD has made, net taxes increases always slow growth at some point. It is not locked in stone at what point net tax increases reverse growth but there is a history to this most of us have lived through several times.
Reagan’s agreement to raise SS taxes from 10% to 12.4% effective 1990 before he left office set the stage for the mild recession Bush 41 compounded by his own tax increases to Clinton’s benefit. Clinton’s marginal income tax increases were balanced on the back side with net reductions in Capital gains reductions for that bulk of the same people who got it taken away on the front side if they followed along with his social engineering….of the tax code. As long as there was a positive gain from investments that produced Capital gains during the Dot.com bubble the overall impact of the marginal income tax increases were offset by those gains. When the music stopped, all that was left was the front side confiscation of income and what followed that for Bush 43? Another recession. What did Bush 43 do, took away the front side confiscation of income for those that he needed to invest again.
Trying to compare that situation to today is a fool’s game. The current crew is trying to raise every level of taxation including those hidden in products and services and service on a national debt almost equal to our GDP and hoping this will create growth outside of “government”. Pure Fairy Tale.
George S| 5.18.11 @ 6:47PM
It would have been more instructive to break down the graph from 1993 to 1997 and from 1998 to 2007. This way you could see the effect of the capital gains tax cut of 1997. As it is, that credit gets swallowed up in the 1993 to 2001 bar. The usual Krugmanesque fudge factor applied once again.
Occam's Tool| 5.18.11 @ 8:19PM
Let's see: the Dow was at 1000 under Carter (and had stagnated for 20 years) and 10,000 plus under Clinton. Like I always say, if Y= 10X, then,
.35Y > .70 X. Besides the fact that Y=10 X.
The only justification for the increase in tax rates is that Liberals are sadists.
axbucxdu| 5.18.11 @ 10:18PM
Tell Ezra to take a look at this one: http://www.minneapolisfed.org/....._large.jpg
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