The Clinton Tax Plan: The Tax Policy Pendulum Swings Back

When Ronald Reagan took office in January of 1991, the highest individual income tax rate was 70% and the highest corporate tax rate was 46%.(1) By the time President Reagan left office in January 1989, the highest individual income tax rate was 28% and the highest corporate tax rate was 34%.(2) This drastic swing of the tax policy pendulum toward favoring saving and capital investment coincided with dramatic economic expansion and unprecedented budget deficits. With ever growing deficit pressures and Congress's inability to control spending, President Clinton's revenue package will swing the tax policy pendulum back toward increasing the share of taxpayers' income claimed by the government.This Essay will examine President Clinton's fiscal program, why it has been forced on us, why it has been forced on him, and then try to predict its future. The Clinton program is not all taxes by any means. It is really a three-part program: stimulus, investment, and deficit reduction. The now defunct short-term stimulus package was designed to get the economy moving again and, considering the size of the U.S. economy, was quite small--$16 to $20 billion in short-term spending and another $5 or $6 billion in tax stimulus.(3) The second part of President Clinton's program is the "investment" package, which is a longer term spending package.(4) The third part of the package is the deficit reduction effort; thus, this part of the package received the most attention during the campaign.(5)II. AN OVERVIEW OF THE CLINTON PROGRAMA. STIMULUSThe stimulus package was referred to in the Clinton camp as a down payment: speeded-up spending on infrastructure, technology, and urban development programs, environmental and energy measures, and the investment tax credit. In an economy with a gross national product approaching $6 trillion dollars,(6) a $20 billion stimulus package would have had little effect. Indeed, there is some question whether it would have had any nonpolitical effect whatsoever.B. INVESTMENTThe longer term "investment" program has a number of facets. President Clinton labels this part of the investment program "Rebuild America."(7) It includes proposals dealing with transportation, the environment, and energy. While some feel that infrastructure spending has been neglected for a number of years, it is questionable how much of a stimulating effect government spending can have. Again, in an economy of our size, government can spend $100 billion or $150 billion, and it is still a mere drop in the bucket. Only private sector spending can produce a major sustained impact on the United States economy; this is a point President-elect Clinton had himself made during the Little Rock "economic summit" in late 1992. Nonetheless, a major prong of the Clinton package is a spending program. While it is politically popular to vote for spending packages, it is also politically risky this year because of the budget deficit. For the first time in many years, people are worried about deficits; thus Congressmen are worried about voting for spending without having an opportunity to vote for deficit reduction at the same time. That is the dilemma they are now facing, and it is thus a problem for President Clinton as well.C. DEFICIT REDUCTIONThat brings us to the third part of the package--deficit reduction. We can thank in large part Mr. Perot's television appearances and the charts he used in those presentations for bringing the deficit front and center in the public eye like it has never been before. Mr. Perot argued persuasively that the deficit is a monumental problem on which we must take decisive action soon. Then President Clinton, in his speech to the joint session of Congress on February 17, did an extremely effective job of describing what the deficit will do to us and our children if we fail to act.(8) The President was particularly persuasive in pointing out the large portion of the federal budget that will be consumed by interest expense and health care costs if we do nothing. …