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Morning Bell: You Don't Grow an Economy by Taxing It Higher

Posted By Conn Carroll On March 6, 2008 @ 9:01 am In Ongoing Priorities | Comments Disabled

Democrats in New York want to raise taxes [1]. Democrats in California want to raise taxes [2]. Democrats in Congress want to raise taxes [3]. Is there a pattern here? Apparently liberals still seem to believe the best way to fight off an economic slowdown is to raise taxes. When pressed to explain how increasing the amount of money the government takes out of the economy could possibly lead to better economic outcomes, many liberals point to the 1993 tax increases as proof that higher taxes can strengthen the economy. The claim is superficially plausible but fails under close scrutiny [4].

A growing body of literature [5] indicates that higher taxes are associated with a smaller economy. In fact, most of the time even liberals seem to operate on the theory that when you tax something you get less of it (think tobacco and energy taxes). Yet somehow liberals are able to turn right around and argue with a straight face that raising taxes on labor and capital does not reduce the supply of either. For evidence, liberals often cite the 1993 tax hikes that went into effect after the 1990-91 recession.

The first thing to remember about that period is that the economy was entering its eighth quarter of recovery as President Bill Clinton took office. The environment for economic growth was also particularly strong. The end of the Cold War brought greater certainty to global markets. The price of energy was low (oil was $11 a barrel) and inflation was at 2%. Despite all this, after Clinton’s tax hike the economy grew only 3.2% from 1993 to 1996.

Then in 1997 Congress cut taxes, including a steep reduction in capital gains. In 1995, before the tax cut, just over $8 billion of venture capital was invested into the economy. By 1998, the first full year in which the capital gains tax cuts were in effect, venture capital pumped almost $28 billion into the economy. From 1997 to 2000 the economy grew 4.2%.

This closer look at the post-1990 recovery shows that the 1993 tax hike probably retarded economic growth while the tax cuts of 1997 almost certainly accelerated it. A good lesson for lawmakers to keep in mind today.

Quick Hits:

  • House Democrat leaders are mulling a plan to capitalize on House Republicans’ failure to act substantively on earmarks [6]. Aides say Dems are considering funding a new round of economic stimulus packages centered on infrastructure that would be paid for by a year’s moratorium on pork projects.
  • A senior British diplomat strongly criticized the latest U.S. NIE [7] that downplayed Tehran’s nuclear ambitions, arguing that the report undercut EU efforts to consolidate support for sanctions against Tehran.
  • A University of Arizona/San Diego State University study [8] found that counties along the Mexican border from California to Texas are shortchanged millions of dollars a year in costs related to prosecuting and jailing illegal immigrants.
  • A National Research Council report [9] advises against a proposal that would collect ballistic fingerprints finding such a database would be too unreliable to be useful in solving gun crimes.
  • Iran’s foreign minister said his country is hoping the next U.S. president will be bring change [10] the mullahs can believe in.

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/03/06/morning-bell-you-dont-grow-an-economy-by-taxing-it-higher/

URLs in this post:

[1] want to raise taxes: http://www.nytimes.com/2008/03/06/nyregion/06millionaire.html?ref=nyregion

[2] want to raise taxes: http://www.latimes.com/news/la-me-taxes5mar05,0,1036814.story

[3] want to raise taxes: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/05/AR2008030503061.html

[4] close scrutiny: http://www.heritage.org/Research/Taxes/wm1835.cfm

[5] growing body of literature: http://www.heritage.org/Research/Economy/wm1826.cfm

[6] House Republicans’ failure to act substantively on earmarks: http://www.cqpolitics.com/wmspage.cfm?docID=news-000002681944

[7] strongly criticized the latest U.S. NIE: http://www.ft.com/cms/s/deb43818-eae9-11dc-a5f4-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fdeb43818-eae9-11dc-a5f4-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus

[8] study: http://www.nytimes.com/2008/03/06/us/06border.html?_r=1&ref=todayspaper&oref=slogin

[9] report: http://www.signonsandiego.com/news/nation/20080305-1327-gundatabase.html

[10] change: http://www.iht.com/articles/ap/2008/03/05/news/UN-GEN-UN-Iran-US-Election.php

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