Tuesday, July 28, 2009

Did Raising Taxes Under Clinton Really 'Work' As Claimed?

What happened the last time we raised tax rates under President Clinton?

I mean, really, did higher tax rates on the wealthy really balance the budget, bring peace to Northern Ireland, and cure cancer as the tax apologia crowd really believes?

We bring this up now because the Obama Administration (which has a ton of ex-Clinton Administration people on board) has been ‘promising’ that we can pay for at least half of his monstrous expansion of health care bill just by asking the really rich people in Hollywood and the NFL to pretty please pay much higher taxes because that is what they are asking them to do.

We don’t mind politicians having the guts to propose higher taxes if that is what they choose to do. We prefer seeing proposals from people who like to raise taxes put on the table for all to see. That is an option far greater than continuing to default to adding infinite amounts of debt for our kids to pay back. Issuing more debt is for cowards in our book.

But will it make any difference? At all?

The truth of the matter is that raising taxes really didn’t do much out of the ordinary when President Clinton and Congress did it in 1993. Had it not been for some extraordinary things that happened in the late ‘90s, plus the Republican Congress holding down the overall rate of growth in spending to below 2% annually, we would not have had even the puny 3 years of budget surplus we did enjoy…briefly, for one shining moment in history, perhaps the last in our lifetimes. Think about that for a moment and let that sink in.

We have seen that no tax on the ‘wealthy’ stays solely on the wealthy…just take a look at the AMT the next time you are filing your tax returns to see what we are talking about. (see AMT)

Bill Clinton and a Democratic Congress rammed through the last tax increase in 1993 with nary a Republican vote on either side of Congress. (Seen this show before? We believe ‘Divided Government' works best)

Did these higher tax rates on the wealthy generate a ton of new revenue in and of themselves in the decade that followed?

No. Really. In fact, we submit that the collection of ‘income’ taxes actually dropped as a percentage of GDP which implies that there was something else going on back then.

Here’s the truth about the vaunted Clinton tax hikes from 1993:

1) Tax collections were swollen by between $50 billion to $150 billion per year from the so-called Social Security surplus tax payments raised in 1983. Check.

2) Capital gains tax payments were abnormally enormous and unexpected due to the explosion in stock options that were exercised during the internet boom, almost $100 billion extra during a couple of years than anticipated in the late 1990’s. Check.

3) As more people earned more money in an expanding economy in the 90’s, they were pushed into higher tax brackets which expanded the number of high-income taxpayers. ‘Bracket Creep’…Check.

4) More and more middle-income people were lopped off the bottom of the taxpaying rolls by more policies eliminating them from income taxation. Check.

The truth of the matter is that when you back out the ever-increasing Social Security surplus payments each year, and deduct the huge extra capital gains taxes that was paid in the later years of the ‘90s, and account for the fact that more and more people were relieved from having to pay any income tax at all during the ‘90s, the average rate of income tax collection for the Clinton years was just below the 18.6% of GDP that has been the average standard since 1970.

Nothing more, nothing less.

And there is absolutely no hope of ever duplicating those unusual economic circumstances now as the Obama Administration tries to ram through this health care bill and tax increase with dominant Democrat majorities in both Houses of Congress. By the way, you should realize that if you are making over $108,000 in AGI, you are in the top 10% of taxpayers in the country; over $153,000 in AGI, the top 5%. Over $380,000 in AGI (2006 figures) and you are in the top 1% category along with Bill Gates and Warren Buffet so be prepared to pay more to Washington.

Or at least be asked to…before you call your tax accountant and lawyer.

Raising taxes didn’t work then and it won’t work now. We are not going to have another explosion of capital gains payments anytime soon, ya think? And the Social Security surplus is starting to dwindle in magnitude as we speak so we can’t count on that smokescreen to continue to cover our relentless spending patterns.

Don’t let the politicians distract you from the real problem facing us square in the face: federal over-spending, especially in the growing federal health entitlement areas.

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