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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