Economy & Budget

Reality check: Taxes Up, Growth Down

Reality check: Taxes Up, Growth Down

President Obama’s claim that “we tried our plan and it worked” is not as ludicrous as it sounds. According to White House Press Secretary Jay Carney, by “our plan,” Obama didn’t actually mean his plan – in place for the past three-and-a-half years – but a different plan, tried 20 years ago.

The President, explained Carney, was “talking about the Clinton plan”–the tax hike of 1993, signed by then-President Bill Clinton.

As Obama put it, he is asking “anybody making over $250,000 a year to go back to the tax rates they were paying under Bill Clinton, back when our economy created 23 million new jobs — the biggest budget surplus in history and everybody did well.”

According to President Obama, hiking taxes caused the boom of the 1990s; therefore, if we raise taxes today, we’ll experience another boom.

BUNK.

It’s true, as Obama says, that Clinton raised taxes in 1993. What he never mentions is that four years later, Clinton cut taxes. When Clinton said–less than a month after his first inauguration–that he was going to raise taxes, economic growth plunged 3.6 points–from 4.3 percent in the fourth quarter of 1992 to 0.7 percent in the first quarter of 1993. But when in May 1997 he announced that he would cut taxes, growth surged 3.0 points–from 3.1 percent in the first to 6.1 in the second quarter of 1997.

More significant, these tax changes had persistent effects: When Clinton was inaugurated in 1993, the country was already in the midst of an expansion, having grown 5.25 percent in fiscal 1992.

Real GDP Actuals
(in billions of dollars)
1991 5,930.50
1992 6,242.00
Change 311.5
Percent Change 5.25%

Source: US Budget FY 2013. Historical Tables. Table 1.2-Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930-2017

Handed a massive “peace dividend” from the end of both the Gulf War and Cold War, the Treasury estimated that the economy would grow an average of 6.87 percent annually over the next four fiscal years.

FY 1992 Budget – GNP Estimates
(billions of dollars)
GNP Change Percent Change
1993 estimate 6,424 438.5 7.33%
1994 estimate 6,876 451.5 7.03%
1995 estimate 7,335 459 6.68%
1996 estimate 7,809 474.3 6.47%

Source: US Budget FY 1992 Part Seven: Historical Tables. Table 1.1-Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GNP: 1934-1996, pp. 15-16

But  after Clinton announced his tax hike, growth over this period averaged just 5.45 percent per year – great by Obama standards, but 1.42 points below expectations.

Real GDP Actuals
(in billions of dollars)
GDP Change Percent Change
1993 6,587.3 345.3 5.53%
1994 6,976.6 389.3 5.91%
1995 7,341.1 364.5 5.22%
1996 7,718.3 377.2 5.14%

Source: US Budget FY 2013. Historical Tables. Table 1.2-Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930-2017

In contrast, in the four years after Clinton announced his tax cut, annual growth increased more than three-quarters of a point, to an average of 6.21 percent.

Real GDP Actuals
(in billions of dollars)
GDP Change Percent Change
1997 8,211.7 493.4 6.39%
1998 8,663.0 451.3 5.50%
1999 9,208.4 545.4 6.30%
2000 9,821.0 612.6 6.65%

Source: US Budget FY 2013. Historical Tables. Table 1.2-Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930-2017

It’s no wonder Christina Romer resigned from her post as Chair of Obama’s Council of Economic Advisers: In 2007 she had co-authored a study of “all significant tax changes since 1947.” It found that “exogenous tax increases have a large, rapid, and highly statistically significant negative effect on output,” and “a tax increase is followed by a large and highly significant rise in the unemployment rate.” In contrast, it concluded, “tax cuts have very large and persistent positive output effects.”

The economy grew just 1.7 percent last year, falling to 1.5 percent for the April-June quarter of 2012. If President Obama continues to bang the drum for tax hikes, he risks slowing growth even further. If he really wants to boost the economy, he must copy Clinton’s 1997 example and cut taxes.

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