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Republican Tax Intransigence Relies on Warped Facts

By Albert R. Hunt
December 16, 2012 11:01 AM EST
Al Hunt
Al Hunt

As many Republicans reject higher tax rates for wealthier Americans, former House Speaker Newt Gingrich urges them to continue to resist, claiming that the economic boom of the 1990s and the resulting budget surplus were due to his leadership in Congress and not President Bill Clinton’s early tax increases.

All economic indicators were heading downward before Gingrich became speaker, he said on NBC’s “Meet the Press” on Dec. 9, and “virtually all the economic growth occurs after Republicans take control” of the House in 1995. The budget was balanced late in the decade because of the tax cut he engineered in 1997, he said.

To paraphrase the late Senator Daniel Patrick Moynihan, Gingrich is entitled to his opinion, but not to his own facts. His facts are wrong.

This is more than the usual Gingrich penchant for self-glorification. The arguments against higher taxes today and those used by Gingrich and his allies against the Clinton tax increase in 1993 are strikingly similar: They will destroy jobs and devastate economic growth, without cutting the deficit.

The facts: The Clinton tax increase on upper incomes, which brought the top rate to 39.6 percent, as President Barack Obama wants to do now, was enacted on Aug. 6, 1993. Over the next 18 months, the economy grew at a rate of about 4 percent; unemployment dropped sharply, to 6 percent from 7.6 percent. The stock market rose moderately.

Shrinking Deficits

Deficits immediately began to narrow, shrinking to $22 billion in 1997 from $255 billion in 1993. In late 1997, a small tax cut that included a reduction in capital-gains levies and a child credit was passed, though the much-larger tax increases enacted four years earlier were left largely untouched. The budget situation continued to improve, moving to surpluses over the next four years. Most economists credit this result to the climate of the decade, which former Federal Reserve Chairman Alan Greenspan and others said was sparked by the 1993 legislation boosting consumer and investor confidence.

Now, the Republican obsession with lower marginal tax rates for the more affluent defies economic and political reality. Polls show strong support for Obama’s position on the top rate.

The Republican notion that revenue can be increased without raising rates is a fantasy. Eliminating the George W. Bush-era tax cuts for upper-income Americans, taking the top rate to 39.6 percent, along with the accompanying changes on some deductions and exemptions, would raise about $600 billion in a decade.

During the presidential campaign, the Republican nominee, Mitt Romney, floated the notion of capping deductions at $50,000 a year; that would raise less than $500 billion if, as would seem certain, it excluded charitable contributions; there would be other controversies and it would hit middle-class taxpayers.

There are significant other tax elements apart from the rates. Some compromises will be necessary on scheduled increases in levies on dividends and capital gains. On the estate tax, although it goes exclusively to the rich, some Senate Democrats such as Max Baucus of Montana and Mary Landrieu of Louisiana, favor a more generous break.

As the political tension mounts over the current fiscal deadlock -- which, unless a deal is reached by Dec. 31, would increase taxes for everyone and force some draconian spending cuts -- there will have to be tradeoffs for any ultimate deficit-reduction deal. Congressional Republicans insist this will only be palatable if there are major cuts to entitlement programs, especially Medicare.

Entitlement Changes

There are clear indications that the White House, despite the objections of some Democrats, would go along with significant changes, perhaps including a form of means testing for Medicare benefits, altering the cost-of-living adjustments for entitlements and taxes.

None of that will fly politically unless it is accompanied by significant revenue increases. Initially, Obama wanted $1.6 trillion over 10 years; he has pulled back to $1.4 trillion. If he gets an amount in excess of $1 trillion -- which would require additional measures beyond ending the Bush-era tax cuts for the wealthy -- a substantive deal on entitlements becomes more palatable.

Even if the current standoff over taxes and spending is resolved in the next two weeks, things are going to get messy early next year. Republicans are intent on using the need to increase the debt ceiling as leverage to force the White House to accept entitlement cuts; Obama is adamant that he won’t play Russian roulette with the debt ceiling again, a reference to last year’s market-rattling last-minute deal.

The only way to avoid that faceoff is to devise some sort of enforcement mechanism before New Year’s Eve that would mandate action on entitlements and increased revenue next year. The test for the president in his second term is to get a deal that is market-credible, inspiring consumer and investor confidence.

The shorter-term test for the Republicans, as some smarter operatives such as former Mississippi Governor Haley Barbour realize, is to move away from an obsession with tax rates for the wealthy. One of the party’s liabilities in the 2012 elections was that it was seen as a protector of the privileged. Threatening a fiscal meltdown to protect lower tax rates for millionaires isn’t a corrective.

(Albert R. Hunt is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this column: Al Hunt in Washington at ahunt1@bloomberg.net

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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