[Pages S15974-S15975]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

WHAT THE '93 TAX INCREASE REALLY DID

<bullet> Mr. KYL. Mr. President, the former Chairman of the President's
Council of Economic Advisors, Martin Feldstein, just wrote an article
for the Wall Street Journal about the 1993 tax increase.
For many of us, it confirms what we have been saying all along: that
tax rate increases and tax cuts change people's behavior. Just because
the Government increases taxes doesn't mean that people will pay more
to the Treasury. They will respond to the higher rates by earning less,
producing less, and investing less.
That is precisely what Mr. Feldstein found. He wrote:

Because taxpayers responded to the sharply higher marginal
tax rates (imposed by President Clinton in 1993) by reducing
their taxable incomes, the Treasury lost two-thirds of the
extra revenue that would have been collected if taxpayers had
not changed their behavior. Moreover, while the Treasury
gained less than $6 billion in additional personal income tax
revenue, the distortions to taxpayers' behavior depressed
their real incomes by nearly $25 billion.

Mr. President, tax rate increases are counterproductive. If the goal
is to increase revenues to the Treasury, the better alternative is to
cut tax rates.
Lower tax rates stimulate the economy, resulting in more taxable
income and transactions, and more revenue to the Treasury. The tax cuts
of the early 1980's are a case in point. Revenues increased from $599.3
billion in fiscal year 1981 to $990.7 billion in fiscal year 1989--up
about 65 percent.
The tax bill before the Senate today begins to undo some of the
damage done by the 1993 tax increase that President Clinton now
disavows. As Martin Feldstein points out, however, it does not go far
enough. Congress should also revisit the issue next year to consider
rolling back the personal tax rate increases that were part of the
Clinton tax bill.
I ask that the entire text of Mr. Feldstein's article be printed in
the Record.
The article follows:

[From The Wall Street Journal]

What the '93 Tax Increases Really Did

(By Martin Feldstein)

President Clinton was right when he recently told business
groups in Virginia and Texas that he had raised taxes too
much in 1993, perhaps more so than he realizes. We now have
the first hard evidence on the effect of the Clinton tax rate
increases. The new data, published by the Internal Revenue
Service, show that the sharp jump in tax rates raised only
one-third as much revenue as the Clinton administration had
predicted.
Because taxpayers responded to the sharply higher marginal
tax rates by reducing their taxable incomes, the Treasury
lost two-thirds of the extra revenue that would have been
collected if taxpayers had not changed their behavior.
Moreover, while the Treasury gained less than $6 billion in
additional personal income tax revenue, the distortions to
taxpayers' behavior depressed their real incomes by nearly
$25 billion.

how it happens

To understand how taxpayer behavior could produce such a
large revenue shortfall, recall that the Clinton plan raised
the marginal personal income tax rate to 36% from 31% on
incomes between $140,000 ($115,000 for single taxpayers) and
$250,000, and to 39.6% on all incomes over $250,000.
Relatively small reductions in taxable income in response to
these sharply higher rates can eliminate most or all of the
additional tax revenue that would result with no behavioral
response.
If a couple with $200,000 of taxable income reduces its
income by just 5% in response to the higher tax rate, the
Treasury loses more from the $10,000 decline in income
($3,100 less revenue at 31%) than it gains from the higher
tax rate on the remaining $50,000 of income above the
$140,000 floor ($2,500 more revenue at 5%); the net effect is
that the Treasury collects $600 less than it would have if
there had been no tax rate increase.
Similarly, a couple with $400,000 of taxable income would
pay $18,400 in extra taxes if its taxable income remained
unchanged. But if that couple responds to the nearly 30%
marginal tax rate increase by cutting its taxable income by
as little as 8%, the Treasury's revenue gain would fall 67%
to less than $6,000.
How can taxpayers reduce their taxable incomes in this way?
Self-employed taxpayers, two-earner couples, and senior
executives can reduce their taxable earnings by a combination
of working fewer hours, taking more vacations, and shifting
compensation from taxable cash to untaxed fringe benefits.
Investors can shift from taxable bonds and high yield stocks
to tax exempt bonds and to stocks with lower dividends.
Individuals can increase tax deductible mortgage borrowing
and raise charitable contributions. (I ignore reduced
realizations of capital gains because the 1993 tax rate
changes did not raise the top capital gains rate above its
previous 28% level.)
To evaluate the magnitude of the taxpayers' actual
responses, Daniel Feenberg at the National Bureau of Economic
Research (NBER) and I studied the published IRS estimates of
the 1992 and 1993 taxable incomes of high income taxpayers
(i.e., taxpayers with adjusted gross incomes over $200,000,
corresponding to about $140,000 of taxable income). We
compared the growth of such incomes with the corresponding
rise in taxable incomes for taxpayers with adjusted gross
incomes between $50,000 and $200,000. Since the latter group
did not experience a 1993 tax rate change, the increase of
their taxable incomes provides a basis for predicting how
taxable incomes would have increased in the high income group
if its members had not changed their behavior in response to
the higher post-1992 tax rates. We calculated this with the
help of the NBER's TAXSIM model, a computer analysis of more
than 100,000 random, anonymous tax returns provided by the
IRS.
We concluded that the high income taxpayers reported 8.5%
less taxable income in 1993 than they would have if their tax
rates had not increased. This in turn reduced the additional
tax liabilities of the high income group to less than one-
third of what they would have been if they had not changed
their behavior in response to the higher tax rates.
This sensitivity of taxable income to marginal tax rates is
quantitatively similar to the magnitude of the response that
I found when I studied taxpayers' responses to the tax rate
cuts of 1986. It is noteworthy also that such a strong
response to the 1993 tax increases occurred within the first
year. It would not be surprising if the taxpayer responses
get larger as taxpayers have more time to adjust to the
higher tax rates by retiring earlier, by choosing less
demanding and less remunerative occupations, by buying larger
homes and second homes with new mortgage deductions, etc.
The 1993 tax law also eliminated the $135,000 ceiling on
the wage and salary income subject to the 2.9% payroll tax
for Medicare. When this took effect in January 1994, it
raised the tax rate on earnings to 38.9% for taxpayers with
incomes between $140,000 and $250,000 and to 42.5% on incomes
above $250,000. Although we will have to wait until data are
available for 1994 to see the effect of that extra tax rate
rise, the evidence for 1993 suggests that taxpayers'
responses to the higher marginal tax rates would cut personal
income tax revenue by so much that the net additional revenue
for eliminating the ceiling on the payroll tax base would be
less than $1 billion.
All of this stands in sharp contrast to the official
revenue estimates produced by the staffs of the Treasury and
of the Congressional Joint Committee on Taxation before the
1993 tax legislation was passed. Their estimates were based
on the self-imposed ``convention'' of ignoring the effects of
tax rate changes on the amount that people work and invest.
The combination of that obviously false assumption and a
gross underestimate of the other ways in which taxpayer
behavior reduces taxable income caused the revenue estimators
at the Treasury to conclude that taxpayer behavior would
reduce the additional tax revenue raised by the higher rates
by only 7%. In contrast, the actual experience shows a
revenue reduction that is nearly 10 times as large as the
Treasury staff assumed.
This experience is directly relevant to the debate about
whether Congress should use ``dynamic'' revenue estimates
that take into account the effect of taxpayer behavior on tax
revenue. The 1993 experience shows that unless such behavior
is taken into account, the revenue estimates presented to
Congress can grossly overstate the revenue gains from higher
tax rates (and the revenue costs of lower tax rates).
Although the official revenue estimating staffs claim that
their estimates are dynamic because they take into account
some taxpayer behavior, the 1993 experience shows that as a
practical matter the official estimates are close to being
``static'' no-behavioral-response estimates because they
explicitly ignore the effect of taxes on work effort and
grossly underestimate the magnitude of other taxpayer
responses.

current proposals

In Congress had known in 1993 that raising top marginal tax
rates from 31% to more than 42% would raise less than $7
billion a year, including the payroll tax revenue as well as
the personal income tax revenue, it might not have been
possible for President Clinton to get the votes to pass his
tax increase.
Which brings us back to President Clinton's own statement
(half-recanted the next day) that he raised taxes too much in
1993. Congress and the president will soon be negotiating
about the final shape of the 1995 tax package. The current
congressional tax proposals do nothing to repeal the very
harmful rate increases of 1993. Rolling back both the
personal tax rates and the Medicare payroll tax base to where
they were before 1993 would cost less than $7 billion a year
in revenue and would raise real national income by more than
$25 billion. Now that the evidence is in, Congress and the
president should agree to undo a bad mistake. <bullet>

[[Page S15975]]

OAK PARK'S 50TH ANNIVERSARY

<bullet> Mr. LEVIN. Mr. President, I rise today to commemorate the
50th anniversary of the founding of the city of Oak Park, MI. The
Family City is most proud of the fact that, despite its great growth
over the past 50 years, it has remained primarily a residential
community.
Oak Park, MI, was established when voters approved the proposed City
Charter on October 29, 1945, and decided that the city should remain a
community of families and homes. Over the years, Oak Park residents
have remained committed to keeping home as the center of their
community. The residents of Oak Park have fought several times to keep
large construction projects from changing the face and the feel of
their community.
Soon after its inception, Oak Park was dubbed ``The City with a
Future.'' In the 1940's, Oak Park had about a thousand residents and a
municipality of just over 5 square miles, which was originally
developed in the 19th century from a swampy, densely wooded hunting
ground. Oak Park grew quickly when many World War II veterans took
advantage of GI loans to purchase houses and settle in the area. The
city was identified as one of the fastest growing municipalities in the
country during the 1950's. It was during this period that the local
government structured the municipal services that so effectively serve
its residents. During the 1960's, Oak Park had established itself as a
mature city with a virtually unchanged population level.
The year 1976 was a turning point in Oak Park's history. When it was
named an official Bicentennial City. It is fitting that, during this
celebration of the birth of our Nation and the ideals on which it was
founded, Oak Park started the transition to the city it is today. Oak
Park soon began welcoming newcomers from a variety of backgrounds and
adopted a new motto: ``The Family City.'' The city also initiated a
program which was dedicated to maintaining the cohesiveness of the
community.
Today, Oak Park is a friendly residential community which boasts a
population representing over 70 ethnic groups. It celebrated its varied
ethnic heritage this year with its 11th Annual International Ethnic
Festival.
The city of Oak Park represents the best of what America has to
offer--a safe, residential community where all people are
welcome.<bullet>

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