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Written by Grassley Press   
Monday, 06 December 2010 14:05

Floor Statement of U.S. Senator Chuck Grassley

Ranking Member of the Committee on Finance

Still Another Chapter of Revisionist Fiscal History: Lame Duck Tax Relief Debate

Thursday, December 2, 2010

Since yesterday, we’ve witnessed in this chamber the resumption of a set of tired and worn talking points that the other side drags out whenever they are forced to finally get around to discussing tax policy.

By once again beating the same dead horse, the other side has attempted to go back in time, again, and talk about fiscal history. Earlier this week there has been a lot of revision or perhaps editing of recent budget history.  I expect more of it from some on the other side.

The revisionist history basically boils down to two conclusions:  1. That all of the “good” fiscal history of the 1990’s was derived from a partisan tax increase bill of 1993; and 2. That all of the “bad” fiscal history of this decade to-date is attributable to the bipartisan tax relief plans

Not surprisingly, nearly all of the revisionists who spoke generally oppose tax relief and support tax increases.  The same crew generally support spending increases and oppose spending cuts.

For this debate, it is important to be aware of some key facts.  The stimulus bill passed by the Senate, with interest included, increased the deficit by over $1 trillion.  The stimulus bill was a heavy stew of spending increases and refundable tax credits, seasoned with small pieces of tax relief.  The bill passed by the Senate had new temporary spending, that, if made permanent, will burden future budget deficits by over $2.5 trillion.  That’s not Senate Republicans speaking.  It’s the official Congressional scorekeeper, the Congressional Budget Office (CBO).  In fact, the deficit effects of the stimulus bill, passed within a short time after Democrats assumed full control of the Federal Government, roughly exceeded the deficit impact of the 8 years of bipartisan tax relief.

All of this occurred in an environment where the automatic economic stabilizers thankfully kicked in to help the most unfortunate in America with unemployment insurance, food stamps and other benefits.

That anti-recessionary spending, together with lower tax receipts, and the TARP activities, set a fiscal table of a deficit of $1.4 trillion that was the highest deficit, as a percentage of the economy, in Post World War II history.

From the perspective of those on our side, this debate seems to be a strategy to divert, through a twisted blame game, from the facts before us.  How is the history revisionist?  Let’s take each conclusion one-by-one.

The first conclusion is that all of the “good” fiscal history was derived from the 1993 tax increase.  To test that assertion, all you have to do is take a look at data from the Clinton Administration.

The much-ballyhooed 1993 partisan tax increase accounts for 13 percent of the deficit reduction in the 1990’s.  Thirteen percent.  That thirteen percent figure was calculated by the Clinton Administration’s Office of Management and Budget (OMB).

The biggest source of deficit reduction, 35%, came from a reduction in defense spending.  Of course, that fiscal benefit originated from President Reagan’s stare-down of the communist regime in Russia.

The same folks on that side who opposed President Reagan’s defense build-up take credit for the fiscal benefit of the “peace dividend.”

The next biggest source of deficit reduction, 32%, came from other revenue.

Basically, this was the fiscal benefit from pro-growth policies, like the bipartisan capital gains tax cut in 1997, and the free-trade agreements President Clinton, with Republican votes, established.

The savings from the policies I’ve pointed out translated to interest savings.  Interest savings account for 15% of the deficit reduction.

Now, for all the chest-thumping about the 1990s, the chest thumpers, who push for big social spending, didn’t bring much to the deficit reduction table in the 1990’s.  Their contribution was 5%.

What’s more the fiscal revisionist historians in this body tend to forget who the players were.  They are correct that there was a Democratic President in the White House.  But they conveniently forget that Republicans controlled the Congress for the period where the deficit came down and turned to surplus. They tend to forget they fought the principle of a balanced budget that was the centerpiece of Republican fiscal policy.

Remember the government shutdown of late 1995?  Remember what that was about?  It was about a plan to balance the budget.  We are constantly reminded of the political price paid by the other side for the record tax increase they put in the law in 1993.  Republicans paid a political price for forcing the balanced budget issue in 1996.  But, in 1997, President Clinton agreed.  Recall as well all through the 1990’s what the year-end battles were about.

On one side, Congressional Democrats and the Clinton Administration pushed for more spending.  On the other side, Congressional Republicans were pushing for tax relief.

In the end, both sides compromised.  That’s the real fiscal history of the 1990’s.

Let’s turn to the other conclusion of the revisionist fiscal historians.  That conclusion is that, in this decade, all fiscal problems are attributable to the widespread tax relief enacted in 2001, 2003, 2004, and 2006.

In 2001, President Bush came into office.  He inherited an economy that was careening downhill.  Investment started to go flat in 2000.  The tech-fueled stock market bubble was bursting.  After that came the economic shocks of the 9-11 terrorist attacks.

Add in the corporate scandals to that economic environment.

And it’s true, as fiscal year 2001 came to close, the projected surplus turned to a deficit.  But it is wrong to attribute the entire deficit occurring during this period to the bipartisan tax relief.  According to CBO, the bipartisan tax relief is responsible for only 25% of the deficit change, while 44% is attributable to higher spending, and 31% is attributable to economic and technical changes. In just the right time, the 2001 tax relief plan started to kick in.   As the tax relief hits its full force in 2003, the deficits grew smaller.  This pattern continued up through 2007.

If my comments were meant to be partisan shots, I could say this favorable fiscal path from 2003 to 2007 was the only period, aside from 6 months in 2001, where Republicans controlled the White House and the Congress.   But, unlike the fiscal history revisionists, I’m not trying to make any partisan points, I’m just trying to get to the fiscal facts.

There is also data that compares the tax receipts for four years after the much-ballyhooed 1993 tax increase and the four year period after the 2003 tax cuts.  I have a chart that tracks those trends.

In 1993, the Clinton tax increase brought in more revenue as compared to the 2003 tax cut.  That trend reversed as both policies moved along.

Over the first few years, the extra revenue went up over time relative to the flat line of the 1993 tax increase.

So, let’s get the fiscal history right.

The pro-growth tax and trade policies of the 1990’s along with the “peace dividend” had a lot more to do with the deficit reduction in the 1990’s than the 1993 tax increase.  In this decade, deficits went down after the tax relief plans were put in full effect.

No economist I’m aware of would link the bursting of the housing bubble with the bipartisan tax relief plans of 2001 and 2003.

Likewise, I know of no economic research that concludes that the bipartisan tax relief of 2001 and 2003 caused the financial meltdown of the September and October 2008.

As I said, from the period of 2003 through 2007, after the bipartisan tax relief program was in full effect, the general pattern was this:  revenues went up and deficits went down.

One major point that needs to be said right here is to state where the government gets the money it spends.  Basically I’m asking “Where do taxes come from?”

I would have thought this would have been perfectly obvious to most people, but I may have been wrong.  Taxes come from taxpayers!  I say this because we have heard tax relief for certain individuals referred to as a bonus.  A search of The Congressional Record for the Senate on December 1, 2010, shows that the word “bonus” was said nearly 50 times.

The implication being that by extending tax relief for all Americans we are giving some people a bonus that other people are paying for.  Let me try to simplify this for my colleagues that are having trouble understanding.  There is no proposal to cut taxes for anyone before this body.  The question is are we going to allow taxes to go up, or are we going to prevent a tax increase?  If we prevent taxes for everyone from going up, we are letting taxpayers keep more of their own money that they have earned and worked hard for.  No one is proposing a bonus or a gift for anyone.  The question is, do we want taxpayers to have more or less of their own money.

My colleagues on the other side have been especially incensed by what they consistently refer to as “tax cuts for the rich” and seem to believe that tax relief for everyone is responsible for our disastrous budget situation.  However, I think nearly everyone serving in the chamber, and certainly the President and House and Senate leadership, supports extending around 80% of tax relief.  If those on the other side are serious in their pleas that taxes must be increased in the name of fiscal responsibility, how can they claim 80% of tax relief is absolutely necessary and that 20% of tax relief is absolutely wrong?

This chart, drawn from Congressional Budget Office (CBO) data, should get more insight into the two groups the other side is talking about.  The orange line measures the effective tax rate paid by the top 5% of taxpayers.  By the way, this is where the Small business owner tax hit occurs.  This group roughly represents those taxpaying families with incomes over $250,000.  Under the Democratic Leadership’s preferred tax policy, this line will go back up to where it was in 2000.  Republicans would prefer to prevent this tax increase, and we have shown that it falls primarily on the backs of small businesses.  The main point this chart shows though is that the tax relief undertaken during the last administration benefited all taxpayers, and characterizing it as “tax-cuts-for-the rich” is simply not accurate.

Of course I want to put our country on a path to fiscal responsibility, but I do not believe that higher taxes will lead us to that path.  Rather we need to carefully examine how we spend the money we already collect.  This debate is about one fundamental question. Who does the money you, the taxpayer, have worked hard for belong to?  Does it belong to the citizen that earned it, or does it belong to the government?  Is whatever the taxpayer is left with an allowance, with the balance to be spent by a government that knows best?  I think most people would answer my last two questions with a strong “No.”

As we continue to discuss pressing tax matters in Congress, we need to keep these fundamental and simple truths in mind.  We need to stop taxes from increasing for all Americans.

Charts used:

Spending Largest Source of Deficit Change Since 2001

Changes in Federal Revenue as a Percentage of GDP

Inherited Deficits 2009 - 2019

Deficits 2001 – 2019

Source of Deficit Reduction 1990 - 2000

Tax Relief vs. Stimulus

Total Effective Federal Tax Rates 1979 - 2007