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Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s BoomPublished on March 4, 2008 by J.D. Foster, Ph.D.

http://www.heritage.org/Research/Reports/2008/03/Tax-Cuts-Not-the-Clinton-Tax-Hike-Produced-the-1990s-Boom

PeakTrader said...

One of the greatest periods of U.S. prosperity was 1995-00. We had a Democrat president and a GOP Congress, a "peace dividend" (after the Cold War), oil prices fell below $12 a barrel, national health care was rejected, accommodative monetary policy (the Greenspan Fed believed inflation wasn't a problem), strong demographics (Baby-Boomers in their peak productive years), a tax cut (in '97 after the tax hike in '93), increases in real wages, and a steep rise in the stock market (including the Nasdaq "bubble").

In 1997, the Republican-led Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton:

Lowered the top capital gains tax rate from 28 percent to 20 percent.

Created a new $500 child tax credit.

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.

Phased in a 15 cent-per-pack increase in the cigarette tax.

Conclusion:

"The Clinton years present two consecutive periods as experiments of the effects of tax policy. The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase."

However, I believe, taxes should've been cut further before 2000. Contractionary fiscal policy (and the Alternative Minimum Tax paid a year later after the stock market peaked), or budget surpluses, drained too much money out of the economy causing the recession.

Conventional wisdom seems to be raise taxes and cut spending to balance the budget.

However, cutting taxes will increase economic growth and tax revenues.

So, to balance the budget, we need to cut taxes and cut spending.

However, we've been on a path of slower economic growth and bigger government rather than faster economic growth and smaller government.

OA said...

Going back to your summary of the Clinton era, you left out the 1997 change in capital gains taxes on primary residences. The "once in a lifetime" capital gains exemption for primary residences was turned into an every couple years tax exemption.

This is conveniently left out of the list of causes for the housing boom. Also think how much capital gains taxes would have flowed into the Treasury during the housing boom if this hadn't been changed, just like the capital gains taxes during the dot com bust was the main reason for the budget surplus back then.

PeakTrader said...

OA, yes, it seems the housing boom was from 1995-06.

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StraightTalk - Economics - The Conference Board
Updated: May 12, 2010

U.S. real GDP growth projected to slow throughout 2010

Q1: 3.2%
Q2: 2.8%
Q3: 2.2%
Q4: 1.6%

Projected annual U.S. real GDP growth

2010: 3.0%
2011: 1.9%

This is a terrible recovery, particularly since we underproduced (and overconsumed) throughout the 2000s, and following a severe recession. Moreover, monetary and fiscal policies have been at full speed.

Compared to the last recovery following a severe recession, in 1982-83, where real GDP growth averaged 8.5% for five consecutive quarters, this is similar to a lead off hitter in baseball batting 0.100 with an on base percentage of 0.150 (real GDP contracted 2.4% in 2009 and expanded 0.4% in 2008).