Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Sunday, June 12, 2011

Another Lie From The Lying Liars at The Heritage Foundation

"Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s Boom"

Well, here is another whopper from one of my favorite conservatard stink tanks.  First, they give us these facts.

In 1993, President Clinton ushered through Congress a large package of tax increases, which included the following:
  • An increase in the individual income tax rate to 36 percent and a 10 percent surcharge for the highest earners, thereby effectively creating a top rate of 39.6 percent.
  • Repeal of the income cap on Medicare taxes. This provision made the 2.9 percent Medicare payroll tax apply to all wage income. Like the Social Security payroll tax base today, the Medicare tax base was capped at a certain level of wage income prior to 1993.
  • A 4.3 cent per gallon increase in transportation fuel taxes.
  • An increase in the taxable portion of Social Security benefits.
  • A permanent extension of the phase-out of personal exemptions and the phase-down of the deduction for itemized expenses.
  • Raising the corporate income tax rate to 35 percent.

And these facts.

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.

All of which I am going to take on faith.

But the '97 tax cut package so lauded by the HF contains 1 item that might be claimed as helpful to business - the capital gains rate decrease, and 1 item that might be helpful to high income earners, the income limits on deductible IRA's, and one thing that helps your heirs when you die.  There are three items that might be helpful to medium or low income earners, one tax increase, one extension, and a depreciation nuance. 
They present charts of GDP growth and growth in real wages in years 1 through 4, following the 1993 increases and the 1997 cuts.  Well, I know a little bit about GDP growth.   Here's a picture.

Do you see anything striking here?  Sure, GDP growth was higher from 1997 through early 2000.  GDP growth increased throughout Clinton's term - all rather neatly contained in a growth channel that includes most of his term - except for the very end.  And wasn't there a dot-com bubble in there somewhere?  Note that the liars chose a four year span to look at - justified in a way by the four years between the hike and cut events.  But they don't specifically define the starting year for their analysis.  Four years after 2007 was 2001 when GDP growth was dismal.  They certainly did not include that.  Since the Bush tax cuts, the economy has gotten steadily worse.  Some how, they forgot to mention that, either.

You'd think the HF liars would favor policies that help business grow, and be against policies that reduced corporate profitability.  Here is a look at how the Clinton era tax changes affected preceded changes in profits ( a cooked number) and Net cash flow (cash receipts minus cash payments over a given period of time -- a real number.)

Cash flow is in blue, after tax profits in red.I've added horizontal lines coming off peaks in July 1997 - the tax cut year.  Cash flow immediately dropped by 10%, and didn't make a full recovery until 2000.  After tax profits styed down even longer, and didn't fully recover until the middle of '02.

The next peaks with fall-offs occur in '05 for cash flow, and '06 for profits.  You can see what's happened since then.

And all of this occurred in an era when corporate profits have been growing at an increasing rate.   Their entire line of reasoning is bull shit.

Here's the Truth about the Heritage Foundation, and the fact-free Rethug dogma that they generate.  They are about tax cuts -all tax cuts, all the time.  They don't care if a tax cut is good or bad for anyone.  Their religion is tax cuts and no piece of contrary data will shake their resolve.  They cherry pick whatever scant data supports their unfounded claims, and lie because the truth is not on their side.

Update: BTW, unlike the lying liars at The HF, I am not suggesting any specific cause and effect relationships in any of the data presented in this post.  Long range, I do believe the low tax era has put us on a bad economic path, due to both primary and second order effects.  However, I am not suggesting that the 1997 tax cut, such as it was, caused the immediate decline in CF and profits.  Sometimes stuff just happens.


The Arthurian said...

Oh good, the update. I was just about to quote you: "Since the Bush tax cuts, the economy has gotten steadily worse."
And I was gonna ask: Do you argue that there is a causal relation between the Bush tax cuts and the economy getting worse?
But we can set that aside. Good.

Anyhow, on the subject of tax cutting, consider this:

Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.

...a surprise from our old friend Bruce Bartlett.

The Arthurian said...

Moron Bartlett here.

Your first graph in this post... "Quarterly GDP Change in the Clinton Era" -- you could easily extend the red and yellow trend lines back to 1992. Or even back to the end of the 1990/91 recession.

I don't look at tax rates as the cause of that "bronze" age. I look at the ending of the deduction for interest on the individual income tax form (possibly listed as "A permanent extension of the phase-out of personal exemptions" under the 1993 tax, but originally part of the Bush-One 'read my lips' tax). I look at the distinct, temporary fall in the growth of debt from 1989 to 1992 or so, vsible here.

And I look at the unusual increase in the quantity of M1 money in the early 1990s, visible here.

And I look at the relation of that slowdown-of-debt and increase-of-money as visible between points (5) and (6) on Graph #1 here.

And the comparable relation occurring between points (1) and (2) on the same graph.

And the comparable relation that begins shortly after point (8).

Jazzbumpa said...

Art -

Lots of good food for thought. Thanx.

I am become, albeit in a highly reluctant and tepid way, a sort-of Bruce Bartlett fan. I saw him on O'Donnell's show last night, and he was making perfect sense. I'm about 90% in agreement with the article you linked in your 2nd comment.

I need to give your links more thought. But I do believe tax policy is highly relevant. As BB is does little to or for business in a direct sense, but skews wealth distribution one way or the other in society, and that is, in JzBian economics the crux.

Nothing in the real world is univariant, but wealth distribution is a huge player since WW II.


The Arthurian said...

Yes, tax policy is highly relevant. But there's more to it than cutting taxes or raising them.

I refer above to "ending of the deduction for interest"... This is an effective way to make accumulating debt less appealing to people. As a result of ending the deduction there was a significant drop in debt increase.

So yes, tax policy is important.

But all you hear from anybody on the internet or on tv or in congress, is about tax *rates*. People get buffaloed by it, and ignore the other, more important parts of tax policy.