The New Republic

Yes, the Clinton-era tax rates manifestly "choked off" economic growth. We haven't had GDP growth and productivity increases to match that period since then. But never mind facts.

- liberalref

April 23, 2012 at 2:53pm

Noah-nothing has company in the 'are you really this stupid or just dishonest' category --- Liberal-Reefer. MYTH: Raising taxes in the 1990s caused the boom years of that decade. This proves that raising taxes leads to economic growth. FACT: Tax cuts, not tax hikes, caused the boom years of the 1990s. The economy grew modestly after Clinton raised taxes in 1993, but the economy grew even more after Clinton signed the tax cuts that were passed by the Republican-controlled Congress under Newt Gingrich’s leadership in 1997. Dr. J. D. Foster: Following the [Clinton] tax hike, the economy performed reasonably well, but not as well as one would expect given the conditions at the time. The real economic boom came later in the decade, just when the economy should have slowed as it made the transition from a period of recovery to normal expansion. Further, this acceleration coincided to a remarkable degree with the 1997 tax cut. . . . In 1997, the Republican-led Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. The 1997 bill: * Lowered the top capital gains tax rate from 28 percent to 20 percent; * Created a new $500 child tax credit; * Established the new Hope and Lifetime Learning tax credits to reduce the after-tax costs of higher education; * Extended the air transportation excise taxes; * Phased in an increase in the estate tax exemption from $600,000 to $1 million; * Established Roth IRAs and increased the income limits for deductible IRAs; * Established education IRAs; * Conformed AMT depreciation lives to regular tax lives; and * Phased in a 15 cent-per-pack increase in the cigarette tax. . . . In 1995, the first year for which these data are available, just over $8 billion in venture capital was invested. Venture capital is especially critical to a vibrant economy because high-risk/high-return investment permits promising new businesses to blossom, rapidly spreading new technologies and new ideas into the marketplace and across the economy. Such investments, when successful, generate returns to investors that are subject primarily to the tax on capital gains. By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again.

- mr_rationale

April 23, 2012 at 4:27pm

Since 70% of taxpayers take the standard deduction, we are talking about a relatively small slice of taxpayers. If the Comprehensive Flat Tax Standard Deduction were converted to a tax credit, that would be an even better reform. Of course, eliminating (or replacing) tax expenditures comes with a huge price for Republican assent: a significant reduction in tax rates. And that combination is the recipe for deficits as far as the eye can see because history, our only guide, tells us that tax expenditures grow like kudzu while tax rates, once cut, require special dispensation from God to increase. Speaking of the Flat Tax, for those not following election results closely, Steve Forbes actually won the presidential election in 2000. Say what? Yep, the nation got his Flat Tax. As for Galston's political advice to Obama to propose tax reform that includes another tax (the VAT) from a tax and spend liberal, the tax reform trap of cutting both tax expenditures and tax rates favored by the VSPs and Republicans that will lead to those exploding deficits previously mentioned, and that we peg the size of the federal expenditures at 20%-21% of GDP to account for an aging population that doesn't believe it will receive any of that 20%-21% because Medicare and social security don't count as federal expenditures, I suggest that Galston re-boot.

- rayward

April 23, 2012 at 4:29pm

Au contraire, nebbish Heritage staffer, productivity increases in the later 1990s greatly surprised economists. They have got you doing scut work over here at TNR. You are victim of history. You would have made great hack in the former Soviet Union. The second half of your comment reads like bad stream-of-consciousness, ray. What is your point?

- liberalref

April 23, 2012 at 4:58pm

This is peripheral, but why in the blue-eyed world does everybody who want to simplify the tax code talk about "reducing the number of brackets"? This is nonsensical. It makes absolutely no functional difference if there are two brackets or two hundred, or for that matter if the tax rate is a continuously-varying function of income. You figure your taxable income, you (or the software, or your accountant's software) looks up the tax in the table, you pay it. Fewer brackets are no simpler, except perhaps for politicians who don't understand math..

- K_Wilson

April 23, 2012 at 6:13pm

The answer to your question is simple, K_Wilson: it's because most who talk about tax simplification aren't interested in simplification at all but rather in reducing tax rates overall, for the rich especially, and also in reducing progressivity. These con-men know that for the majority of taxpayers, hence the majority of voters--the 70% who take the standard deduction--the most complicated looking aspect of their tax return is those pages and pages of tables. It is also the case that the more brackets their are, the more likely it is that a given taxpayer's income comes in just over a cutoff. Such folks are apt to feel like they're getting screwed and are receptive to calls for "simplification." The thing that such advocates realize that the public doesn't is that any decrease in the number of brackets will inevitably be accompanied by a decrease in rates for the upper brackets. If you merge two brackets there is no way in hell, politically speaking, that the rate for the final combined bracket will equal the rate for the higher of the two antecedent brackets.

- AaronW

April 23, 2012 at 7:14pm

"Muddled Through"? We had the longest expansion of the US economy since WW-II. The Clinton tax-rates were a brilliant repudiation of the Laffer Curve and Supply-Side Economics. Having tried out Supply-Side under Reagan, and ballooned the national debt, the Clinton tax-rates actually began paying some of it back for the first time since 1963. We are ill served by pseudo-Supply-Side rhetoric that we simply "muddled through" with the Clinton tax-rates.

- AllanL5

April 24, 2012 at 9:07am

The difference between someone like Mr. Rat and William Galston is about like the difference between hard-core pornography and soft-core pornography. Neither hard-core nor soft-core porn can be considered literature any more than their different versions of economic pornography have anything to do with reality. There is virtually no direct relationship between income tax rates and economic growth. To the extent that there is one, the historical evidence would clearly show a high correlation between high growth and high rates. The economic porn peddled by the right (and I consider Galston part of the right although he doesn't want to think so) is that having an efficient, equitable tax system that fully pays for government when we are not in an economic slump is inimical to growth. Hence, Galston keeps peddling the same economic trash that we have to figure out the trade-off between a functioning tax system and growth. This is utter nonsense, and the only excuse for Galston continually to peddle this trash is that he doesn't know anything at all about economics. The indirect relationship between taxes and growth is that there is a clear relationship between relatively low inequality in after-tax income distribution and high growth. Thus, to the extent that the tax system is (1) paying for government (or at least giving us declining public debt as a percentage of GDP) and (2) equalizing after-tax income, it is helping growth. This is not merely coincidence; there is a clear causal connection. Growth is due to demand, and income equality increases demand. It is the nature of an industrial economy that we have mass-produced goods. Even the rich cannot get rich by producing small numbers of very expensive goods; they get richest by producing very, very large numbers of inexpensive goods. That requires a large market for those goods, and you cannot have a large market if you have high income inequality. Simple as that. The idea that investment is the source of growth is wrong. Thus, the modestly rational claim that more money in the hands of the investor class produces higher growth is wrong (but at least has a thin veneer of plausibility unlike most of the economic garbage peddled by the right). Investment comes in response to demand for the output. If there is not sufficient demand for the output, there is no investment, no matter how much money you give the rich. When they have too much money and not enough real investment opportunities -- a mutually reinforcing state of affairs since lots of income for the rich implies not so much for everyone else -- the result is not investment but asset bubbles -- too much investable money chasing too few investment opportunities. Anyone seen an asset bubble around here lately? The Reagan tax cuts and Bush tax cuts are demonstrable economic flops. Unequivocal. There is no reason to keep talking about them as though these are something to be preserved or treated with great delicacy lest we throw out the baby with the bath water. We already threw out the baby and kept the bathwater when we made those tax cuts. Time to throw out the bathwater and find the baby. The function of the tax system is indeed to raise sufficient revenues to pay for government in the manner that produces the least economic distortion and best promotes growth. In our era, those goals are not however conflicting. We would achieve them with a system that fully funds the operations of government, that is, with no structural deficit. Because we have a much less equal gross distribution of wealth than in the years between the end of WWII and 1980, we need a tax system that is more, not less progressive than in those years. Instead, we have a system that has become less progressive just as income inequality has grown. Thus, rather than countering the loss of demand due to income inequality, the Reagan and Bush tax cuts exacerbated it producing slower growth. That's why the Reagan and Bush eras managed to combine slower growth and the only post-war periods in which debt has been increasing as a percentage of GDP (I include in that the Obama administration because we still have both Bush's tax policies and Bush's recession to contend with). It could not be any clearer. Libertarian, right-wing and Galstonian economics are right up there with climate-change denial and creationism. Pure, ideologically/theologically motivated craziness. Simplicity in the tax code comes not from few brackets (although we don't need more than three at the most). It comes from not having different classifications of income and a raft of exceptions. The complexity comes from having to classify flows in a multitude of ways. If all gross income were taxed, without exception, at identical tax rates (no differences in rate based on type of income), we would have a very simple system. Also, eliminating all of the different exceptions is what would permit us to have a progressive, redistributive system, mitigating gross income inequality in the service of both equity and growth, without having to have extremely high nominal marginal rates. When we narrow the tax base with exceptions, we need higher nominal rates to raise the revenue we need. With those ideas in mind, I consider an ideal federal income tax system to have the following features: 1. All corporate/business income is passed through so that it can be subject to progressive taxation. Eliminate direct business income taxes. 2. Mark-to-market for gains and losses on marketable securities. 3. No deductions from gross income other than for state income taxes (requires a long explanation but suffice to say here that the portion that goes to the state as income tax is only nominally the income of the citizen who pays it). 4. A zero bracket, a 50% bracket, and possibly a 67% bracket to get at the super-high end, the 1%ers. 5. A high-end alternative minimum tax on consumption (defined as total revenues less investment expenditures) to offset the deferral of income tax on non-marketable securities. We should fund any current gaps between entitlement income and expense with carbon taxes and gradually eliminate payroll taxes in favor of carbon taxes. That should shut up all the idiots complaining about people who don't pay taxes, but it won't. Obviously, there are huge political obstacles to achieving this, not the least of which is that the people who claim to want tax reform don't want tax reform at all. They want further reductions on the taxes paid by the wealthy and higher taxes on everyone else. "Tax reform" is bullshit rhetoric that serves only to conceal their objective, and that most certainly includes William Galston. But any tax proposal can be evaluated on how much it deviates from such a system while balancing the budget. I would almost guarantee that the proposals of Galston et alia, if analyzed carefully, would show a larger deviation than the present system. This is not tax reform, it is tax predation hiding in tax reform clothing.

- roidubouloi

April 24, 2012 at 10:33am

Mr. Noah wrote: "3.) Galston recognizes that government's share of the GDP will have to rise. As a moderate, he is brave to say so." Revenue as a percentage of GDP was 15.4% last year, it's not at all brave to say that it needs to increase, even for a conservative like Paul Ryan. Representative Ryan's budget projects that revenue as a percentage of GDP will rise to 18% by 2014. The crazy thing is that Ryan has also pledged that his tax reform will be revenue neutral. I wish Mr. Noah or Mr. Galston would be 'brave' enough to ask Representative Ryan how revenue as a percentage of GDP will increase without increasing taxes.

- rsalzberg

April 24, 2012 at 4:51pm