Economy barely growing, Obama still pushing tax hikes
If you were hoping that the recent economic report would bring a change in direction from the White House on taxes, you were no doubt let down. The Commerce Department reported on Friday that gross domestic product (GDP) grew by only 1.5% in the second quarter of the year and consumer spending was down, once again showing the weakness of the economic recovery.
When pressed on whether or not the weak economic growth would bring a change in direction from President Obama, who is trying pushing tax hike proposal through Congress, White House Press Secretary Jay Carney insisted that tax hikes during a slow economy weren’t a bad idea. Alan Krueger, President Obama’s top economic adviser, also said that the reason the economy was lagging was because state governments need more stimulus spending.
It seems, however, that not only will the White House push more stimulus gimmicks, they are going to continue to push a tax hike that will have anywhere from a 1.3% to 2.9% contraction in the economy.
But Keynesians pushing a tax hike during tough economy times is question, one that would probably earn the ire of the man himself. Christina Romer, who served as an economic adviser to President Obama, once noted that tax hikes hurt the economy:
In a study she and her husband, David Romer, conducted before she joined the administration, Ms. Romer found large multipliers from tax cuts, which she concluded “have very large and persistent positive output effects.” Tax increases, she also found, hurt growth.
This is a point that Veronique de Rugy highlighted last week, noting that the “standard Keynesian theory recommends against raising taxes during economic downturn since it will hurt economic growth and, as such, makes it even harder to get debt burdens under control.”
And while the White House says that Bill Clinton raised taxes in the 1990s and the economy saw growth, the editoral board at the Washington Examiner points out that there was a lot more to the equation, including some tax cuts for higher-income earners that eventually led to an economic boom:
Under President Clinton, the tax rates had two major adjustments — a tax hike in 1993 and a tax cut in 1997. In 1993, the top marginal rate was raised to 39.6 percent and the corporate rate to 35 percent. From then through 1997, the economy grew at an average annual rate of 3.2 percent in inflation-adjusted terms — which is respectable, but not the boom we all remember. Wages stagnated during that same four-year period, growing by less than 1 percent overall.
In 1997, a Republican Congress pushed Clinton to agree to what we now call “tax cuts for the wealthy.” He signed a bill lowering the top tax rate on capital gains from 28 percent to 20 percent; raising the exemption from the estate tax (or death tax, if you prefer) from $600,000 to $1 million. What happened next? Between 1997 and 2000, the economy boomed. It posted 4.2 percent growth, and wages grew 6.5 percent. Unemployment, which stood at a very decent 5.3 percent in 1997, fell to 4.2 percent, a level so low that many economists previously thought it was unreachable. The stock market boomed. Total market capitalization of the S&P 500 rose by 95 percent between 1997 and 2000. And despite the lowering of the rate, capital gains tax receipts rose from $67 billion in 1996 to $115 billion in 1999.
So what exactly is the lesson of the Clinton economy? To be sure, there is much more to the story than tax rates, but it seems a stretch to conclude from the experience that higher rates are somehow better. Quite the contrary, in fact. The fondly remembered Clinton boom years immediately followed a lowering of taxes on investments and inheritances precisely the sort of tax cuts Obama now denounces as “their plan,” which supposedly didn’t work.
President Obama insists now that his economic proposals have worked. But it’s really hard to believe that when we’re staring at such tepid economic growth. As James Pethokoukis explains, during the recovery under Ronald Reagan, cumulative economic growth vastly outpaced what we’re seeing under currently. It’s hard to look at the sum of what we’re seeing any believe anything other than President Obama’s economic policies have been a failure.