Carney said yesterday that despite claims of “economic Armageddon” in 1993 over Clinton’s tax increases on the wealthy, America saw “the longest peace time expansion of the economy in history” with “23 million jobs created.” He also said “the middle class saw its position made more secure – middle class incomes actually went up” and that “millionaires and billionaires did pretty darn well”:
But that’s not true according to Forbes contributor Charles Kadlec. First he notes what Clinton passed in 1993:
The 1993 Clinton tax increase raised the top two income tax rates to 36% and 39.6%, with the top rate hitting joint returns with incomes above $250,000 ($400,000 in 2012 dollars). In addition, it removed the cap on the 2.9% Medicare payroll tax, raised the corporate tax rate to 35% from 34%, increased the taxable portion of Social Security benefits, and imposed a 4.3 cent per gallon increase in transportation fuel taxes.
Kadlec says these tax increases were so unpopular that the Republicans won both the House and Senate in the historic elections of 1994:
Yet, in the 1994 elections, the Democratic Party suffered historic losses. Even though Senate Majority Leader George Mitchell had declared the unpopular HillaryCare dead in September of that year, the Republican Party gained 54 seats in the House and 8 seats in the Senate to win control of both the House and the Senate for the first time since 1952.
He then describes the economic conditions under the first four years of Clinton’s presidency:
During the first four years of his Presidency, real GDP growth average 3.2%… Employment growth was a respectable 2 million a year. But real hourly wages continued to stagnate, rising only 2 cents to 7.43 an hour in 1996 from $7.41 in 1992. No real gains for the middle class there. …
With that stage set, Kaldec then describes what actually led to the astounding growth we saw in the late 90s, and it wasn’t tax increases on the wealthy:
However, with his masterful 1995 flip-flop on taxes, President Clinton took the first step toward a successful campaign for re-election and a shift in policy that produced the economic boom that occurred during his second term.
- Welfare reform, which he signed in the summer of 1996, led to a massive reduction in the effective tax rates on the poor by ameliorating the rapid phase out of benefits associated with going to work.
- The phased reduction in tariff and non-tariff barriers between the U.S., Mexico and Canada under the North American Free Trade Agreement continued, leading to increased trade.
- In 1997, Clinton signed a reduction in the (audible liberal gasp) capital gains tax rate to 20% from 28%.
- The 1997 tax cuts also included a phased in increase in the death tax exemption to $1 million from $600,000, and established Roth IRAs and increased the limits for deductible IRAs.
- Annual growth in federal spending was kept to below 3%, or $57 billion.
- The Clinton Administration also maintained its policy of a strong and stable dollar. Over his entire second term, consumer price inflation averaged only 2.4% a year.
The boom was on. Between the end of 1996 and the end of 2000:
- Economic growth accelerated a full percentage point to 4.2% a year.
- Employment growth nudged higher, to 2.1 million jobs per year as the unemployment rate fell to 4.0% from 5.4%.
- As the tax rate on capital gains came down, real wages made their biggest advance since the implementation of the Reagan tax rate reductions in the mid 1980s. Real average hourly earnings were (in 1982 dollars) $7.43 in 1996, $7.55 in 1997, $7.75 in 1998, $7.86 in 1999, and $7.89 in 2000.
- Millions of Americans shared in the prosperity as the value of their 401(k)s climbed along with the stock market, which saw the price of the S&P 500 index rise 78%.
- Revenue growth accelerated an astounding 59%, increasing on average $143 billion a year. Combined with continued restraint on government spending, that produced a $198 billion budget surplus in 2000.
Shared prosperity indeed! But one created not by raising tax rates on high income but not yet rich middle class families, and certainly not by raising the capital gains tax rate or by imposing the equivalent of the Buffett rule, a new alternative minimum tax of 30% on incomes over $1 million, nor by massively increasing federal spending.
Rather, it was a prosperity produced by freeing America’s poor from a punitive welfare system, lowering tariffs, reducing tax rates on the creators of wealth, limiting the growth of federal government expenditures, and providing a strong and stable dollar to businesses and families in America and throughout the world.
So there you have it. Tax cuts and good fiscal policy did what Carney is arguing happened because of the 1993 tax increase on the wealthy.