Floor Statement of Sen. Chuck Grassley

Revisionist History on Tax Increases, Economic Success

Delivered Wednesday, Aug. 1, 2012

Over the past few years, my colleagues on the other side have come to the floor repeatedly to present a revisionist story regarding the fiscal history of the last two decades.  On several occasions, I have come to the floor to refute this history.  Yet, again and again, the other side continues to present the same distorted facts, including just last week.

The general misguided argument is that all the economic and fiscal success of the 1990s is thanks to the Clinton tax increases, and the 2001 and 2003 bipartisan tax relief is responsible for all our economic and fiscal ills.

Neither of these claims is supported by the facts or a basic understanding of economics.

Let me begin with the Clinton tax increase.  Many on the other side of the aisle argue that Clinton tax increases are proof that tax increases will not harm our economy today.

They frequently ask, "If our economy grew in the 1990s with higher marginal tax rates, how can it be bad to raise marginal taxes to these former levels?"  Engrained in this argument is the assertion that tax hikes can actually be good for our economy.

This assertion fails to take into account the numerous economic factors that occurred alongside the Clinton tax increases. The fact is the economy grew, not because of the 1993 tax increases, but despite them.

The economy of the mid-1990s is a result of economic conditions that we may never see again.

It was a time of great economic expansion due, in large part, to the advent of the internet economy.  The internet spawned new technologies and created efficiencies in our economy that have never been matched.   In turn, these new technologies and efficiencies spurred startup businesses and new industries.

And, many seem to forget the huge Y2K fear that gripped the nation, causing billions and billions of dollars in government spending that helped prop up what became the infamous internet bubble that blew up on all of us.  Nevertheless, before the bubble burst, these factors led to historically low unemployment and high workforce participation.

Claiming this was due to the Clinton tax increase is equal to Vice President Gore's claim that he invented the internet.

My colleagues on the other side of the aisle would be hard-pressed to find many economic studies indicating tax increases are stimulative.  The focus of economic research in this area is not about whether tax increases are harmful or beneficial to the economy.  Rather, the focus is on the degree to which tax increases are harmful.

Admittedly, there are wide variations in the views of economists on the responsiveness of individuals and businesses to taxes.  However, even studies by economists who can hardly be labeled as conservative have concluded that tax increases have a significant negative effect on the economy.

For instance, a 2007 study by Christina Romer, President Obama's former chief economist, found that "tax increases are highly contractionary" and "have very large effects on output."

In fact, this study found that a tax increase of one percent of Gross Domestic Product could lower real GDP by as much as 3 percent.

Another likely contributor to the growth of the 1990s was the peace dividend we reaped from the end of the Cold War.  We have Ronald Reagan's stare down with the Soviet Union to thank for this.

The end of the Cold War allowed for a reduction in government spending as a percent of GDP.  Coupled with priorities pushed by the Republican-led Congress to reach a balanced budget and reform welfare, spending as a percent of GDP dropped to its lowest point in over 30 years.

With the government spending less of the people's money, more was left in the hands of the private sector. This allowed the private sector to innovate, invest, and create jobs.

The peace dividend is also the largest contributor to reigning in deficits in the 1990s.  The biggest source of deficit reduction, 35%, came from a reduction in defense spending.

The next biggest source of deficit reduction, 32%, came from other revenue because of the growing economy.

Another 15% came from interest savings.

The Clinton tax increases, on the other hand, only accounted for 13% of the deficit reduction.  That's right, only 13%.

There are further factors that contributed to the economic growth of the 1990s, including the expansion of free trade and the 1997 reduction in the capital gains tax rate.  However, in the interest of time, I won't go into these or other factors.

However, one thing is clear: The economic growth in the 1990s was not thanks to the Clinton tax increase.  Nor was it a major player in bringing our deficit into balance.

Today, we cannot rely on the unique economic conditions we experienced in the 1990s, some of which were artificial, to buttress the negative effects of a tax increase.    In fact, we are in the middle of one of the worst economic eras since the great depression.

Unemployment has remained above 8% now for more than 41 straight months - almost 3 ½ years.  Economic growth has been anemic.

Each passing day economic indicators are pointing more and more to the chance of a double dip worldwide recession.  Last Wednesday, it was reported that Great Britain's economy contracted at a rate of .7%. Then on Friday, it was reported that our own economy is stalling.  Real GDP grew at an annual rate of just 1.5%, continuing its downward trend for 3 straight quarters.

In a recent blog post, Nobel Laureate Economist Gary Becker addressed the question of whether raising taxes on high-income earners is a good idea.

In his post, Professor Becker entertained arguments by supporters of tax increases by hypothesizing that there is a 50-50 chance that higher taxes on the so-called rich would damage the economy.

Of course, I believe, as does Professor Becker, that in reality this chance is much higher than 50-50.  However, even granting the other side this generous assumption, he concluded the benefit of raising taxes was outweighed by the potential damage they would cause.

According to Professor Becker, even if richer individuals only slightly reduce their work hours and effort at work, the gain in tax revenue from these individuals would not be great.

In contrast, "the cost to the economy in the chance that higher taxes greatly discourage their effort is likely to be substantial in terms of fewer hours worked and less work effort by high income individuals, reduced incentives to start businesses, less investments in their human capital, investing abroad rather than in the US..., , and even migration abroad."

Yet, my colleagues on the other side are pushing billions of dollars in tax increases.   Just last week, they voted to increase taxes on nearly 1 million flow-throw businesses.  Their vote to increase taxes on job creators came on the heels of an Ernst and Young study detailing its ramifications.

This study concluded that these proposed tax hikes ? on top of 3.8 percent tax increase on dividends, interest, and capital gains that was added to pay for so-called health reform ? would reduce our economic output by 1.3 percent.  The Ernst and Young study also found that real after-tax wages would fall by 1.8 percent as a result of President Obama's policies.

Even in the face of this information, my colleagues on the other side seem all too willing to gamble with the chance that our stalling economy can withstand such a hit.  By doing this, they are playing Russian roulette with our economy.

To my colleagues I ask, how certain are you that tax increases on job creators won't be damaging to the economy?   If you have any doubt, don't pull the trigger.

Let me shift gears a little bit to address the record of the 2001 and 2003 tax relief.

Just as a perfect storm of good economic conditions blew at the back of the Clinton Administration, a perfect storm of bad economic conditions and unpredictable events blew in the face of the Bush Administration.

It is undisputed that, at the end of the Clinton administration, the Congressional Budget Office (CBO) was projecting a ten-year budget surplus of $5.6 billion.  Keep in mind, though, that CBO's projection was based on assumptions that did not pan out.

CBO failed to predict the bursting of the tech bubble that was so beneficial in previous years.  CBO also could not predict the September 11, 2001, tragedy that wreaked havoc on our economy.

In reaction to the economic recession from these events, Congress enacted the bipartisan 2001 tax relief that cut tax rates across the board, providing tax relief to virtually all taxpayers.

Then, in 2003, Congress expedited this relief so the benefit of lower rates would take effect more quickly.  This resulted in one of the shortest and shallowest economic recessions on record.

The economy grew for 25 straight quarters, making it the fourth-longest period of economic expansion since 1930.  Additionally, we had 47 straight months of private sector job gains.

Moreover, the expanding economy led to higher than expected revenue.  That's right.  Revenue actually rose in the years following the tax relief, peaking at 18.5% of GDP in 2007; well above the historical average of around 18%.

In fact, CBO projects that, if we extended all the 2001 and 2003 tax relief today, revenues would once again exceed the historical average.  Under this scenario, the CBO projects that by 2022 revenues will reach 18.5 percent of GDP.

From 2004 to 2007, the deficit also shrank from a high of $412.7 billion to a low of $160.7 billion.  That means the budget deficit was cut by more than half in just three years.

Given the trillion dollar deficits we are experiencing under President Obama, a deficit below $200 billion would be welcome news.

Yet, CBO projects that, even if all the tax increases in the President's budget were enacted, deficits would never drop below $500 billion from 2013 to 2022.

I will give the President this: He took office in very tough economic times.  The bursting of the housing bubble and the resulting financial crisis gave him a high hill to climb.

But, any assertion that that the 2001 and 2003 tax relief is related to these events is without any merit.

There is plenty of blame to go around for the housing bubble.  It was the culmination of housing policies spanning administrations of both parties.  It was further fueled by the Federal Reserve providing historically low interest rates and cheap credit.

However, the President's policies have failed at getting us out of this mess. The President's party passed the President's nearly trillion-dollar stimulus bill.  He claimed this would keep the unemployment rate below 8%.  However, the unemployment climbed to a high of 10.1% and has never dropped below 8% during his almost four years in office.

The President's party also passed the health care bill, which the President sold as a job creator, and the financial reform bill that was supposed to fix our financial system.  However, both of these bills, which the President signed into law, have actually turned out to be costly to our economy and a hindrance to job creation.

Now President Obama appears ready to gamble with the economy.  He appears ready to go all in on raising taxes on our nation's job creators.

In doing so, he is betting that raising taxes on the so-called wealthy will result in a political pay-off, exceeding the chance his actions will throw us back into a recession.

It is not so long ago I remember the President saying, "You don't raise taxes in a recession."  The President's statement is as true now as it was then.

Let's end the political theater of holding votes for the purpose of campaign ads.  Let's instead actually do what the people sent us here to do.   Let's not drive the American economy headlong off the fiscal cliff.