THE BUDGET DEBATE; Congressional Record Vol. 142, No. 50
(Senate - April 18, 1996)

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[Pages S3681-S3683]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                           THE BUDGET DEBATE

 Mr. ABRAHAM. Mr. President, as the Senate continues to debate 
our proper budget priorities, I have noted the presence of a number of 
inaccurate arguments. These arguments, in my opinion, are distracting 
us from the central question of how our taxing and spending policies 
affect middle-class Americans. Particularly worrisome to me are 
inaccurate views concerning the historical performance of tax cuts, and 
their impact on middle-class income in particular. Specifically, some 
are arguing that tax cuts in the 1980's produced lower incomes for our 
middle class, and saddled them with a larger percentage of total tax 
receipts.
  In an attempt to focus debate more effectively on questions of what 
will and will not work for the American people, I would like to have 
inserted into the Record an article of mine, published recently in The 
World & I. In this article I set forth my view of the real effect of 
tax cuts in the 1980's. As published, the article is accompanied by 
spirited responses and defenses from several distinguished observers, 
including Gary Burtless of the Brookings Institution, Michael Meeropol 
of the Center for Popular Economics, Bruce Bartlett of the National 
Center for Policy Analysis, Norman B. Ture of the Institute for 
Research on the Economics of Taxation, and Paul M. Weyrich of the Free 
Congress Foundation.
  I argue that the pro-growth and pro-family tax policies of the 1980's 
contributed significantly to the prosperity of America's middle-class 
families. In

[[Page S3682]]

addition, I point out that tax cuts produce lower, not higher, deficits 
and that tax cuts help the middle class and poor more than the rich. 
Not all the respondents agreed completely with my argument. But I 
believe the article can help all of us form more useful, coherent 
arguments as we face the budget challenges ahead.
  The article follows:

                            The Real 1980's

                          (By Spencer Abraham)

       The debate over the budget is becoming a debate over the 
     1980s. Opponents of tax cuts and spending restraints are 
     claiming that these policies wreaked havoc when tried before 
     under Ronald Reagan. The policies of the 1980s, in this view, 
     hurt American families and the American economy, and so 
     should not be repeated.
       To answer this criticism, one must explode three 
     interrelated myths that are exercising undue influence over 
     the budget debate today:
       The progrowth and profamily tax policies of the 1980s 
     actually hurt America's middleclass families.
       Tax cuts necessarily increase the budget deficit.
       Tax cuts disproportionately benefit the rich at the expense 
     of the middle class and poor.
       Using these myths, defenders of the status quo paint 
     reformers as heartless friends of rich people and enemies of 
     the poor and middle class. By exploding them, we can return 
     the focus of our budget debate to the question of how best to 
     reform tax and spending policies for the benefit of all 
     Americans. But to do this, we must reestablish the truth 
     about how our nation's middle class really fared under the 
     low-tax, limited-government policies of the 1980s.


                               myth no. 1

       The claim that middle-class families suffered under 
     conservative reforms is based on an inaccurate representation 
     of the income data. For example, opponents of reform have 
     said over and over that household income fell over a 15-year 
     period, from $38,248 in 1979 to $36,959 in 1993, and that 
     this decline was the direct result of the policies of Ronald 
     Reagan and the Republicans. They wield a frightening graph, 
     much like figure 1.
       But the graph does not reflect reality. These 15 years did 
     not constitute one monolithic era of Republican policy 
     dominance. Rather, they included two periods characterized by 
     overtaxation and overregulation (1979-81 and 1990-93) and one 
     period (1982-89) during which Republican policies of lower 
     taxes and less regulation were in place. An accurate 
     portrayal of this overall period would look like figure 2.
       In truth, this 15-year period consists of one era of 
     middle-class prosperity under low-tax, limited-government 
     policies and two eras of middle-class pain under policies of 
     high taxes and increased regulation. Americans had 8 years of 
     improvement in middle-class incomes from 1982 to 1989. 
     Unfortunately for the middle class, the periods from 1979 to 
     1981 and 1990 to 1993 were dominated by overtaxation and 
     overregulation, policies that resulted in declines in middle-
     class incomes.
       Opponents of reform attempt to paint Ronald Reagan's low-
     tax, limited-government policies as harmful by treating the 
     1979-93 period as if all of it were in the Reagan era. They 
     wrongly imply that Reagan was president and Republicans were 
     in control throughout this period.
       On closer inspection, it becomes clear that the first 3 of 
     the 15 years were under high-tax and heavy regulatory 
     policies. It is also clear that, during this first period, 
     real median family income fell precipitously from over 
     $38,000 to under $36,000, for a total loss of over $2,500, 
     according to Census Bureau data. In fact, one of the 
     sharpest declines in median family income on record 
     occurred in the year 1980.
       As anyone with a working knowledge of the calendar and even 
     a passing interest in American politics Knows, Ronald Reagan 
     was not president in 1979 or 1980. Jimmy Carter was. Further, 
     Republicans controlled the Senate for only the first 6 years 
     of Reagan's tenure.
       What is more, Republicans did not control the House of 
     Representatives at any time during this 15-year period. 
     Democrats were in charge the entire time. And, in 1979 and 
     1980, they controlled both the legislature and the 
     presidency.
       Yet opponents of lower taxes and slower spending growth 
     almost always include 1979 and 1980, the last years of the 
     Carter era, in describing the impact of the Reagan 
     administration's conservative tax and regulatory reforms. But 
     no matter how much one opposes tax cutting and deregulation, 
     it is difficult to argue that these policies, pursued under 
     Ronald Reagan and the GOP in 1981 and beyond, were bad enough 
     to cause income declines in the years before they were 
     implemented.
       Unlike the 1993 Clinton income tax increases, many of which 
     were implemented retroactively, the 1981 Reagan economic 
     policies did not take effect until the middle of 1982. And 
     what happened after these policies went into effect in 1982? 
     As anyone can see from figure 2, real, postinflation median 
     family income in the United States rose between 1982 and 
     1990, from $35,419 to $39,086, for an increase of 10.4 
     percent.


                       cold water on the economy

       But in 1990, the Democratic majority in Congress began 
     insisting that tax-revenue increases had to be part of any 
     effort to reduce the budget deficit. The result was the 
     budget summit deal of 1990.
       After that, again shown in figure 2, we saw a different 
     pattern. Between 1990 and 1993, median family income 
     plummeted 5.4 percent, from $39,086 to $36,959. The most 
     severe drop in middle-class income began in 1993, the year 
     the Clinton retroactive tax increases took effect. In that 
     year, there was a remarkable $709 (1.9 percent) plunge in 
     real median family income.
       So what conclusion should we reach? The answer seems clear: 
     Republican economic and tax policies helped the middle class. 
     Thus, to get middle-class incomes moving upward again, we 
     should return to the low-tax, deregulatory policies of the 
     1980s. These policies produced one of the most dramatic 
     increases in middle-class incomes in the last 30 years.
       Nineteen million new jobs were created between 1982 and 
     1989--2.4 million in 1989 alone. And 82 percent of these jobs 
     were in higher-paying occupations: technical, precision 
     production, and managerial and professional. Clearly then, 
     tax cuts helped the middle class in the best way possible, by 
     producing economic opportunity and good jobs.
       This brings us to a subset of the first myth: that the rich 
     got richer and the poor got poorer during the 1980s. Once 
     again, this claim is unsubstantiated by the facts. First, let 
     us look at a graph (fig. 3) that surfaced during the economic 
     policy debate.
       According to this figure, the 15 years between 1979 and 
     1993 produced:
       A 15 percent decline in real family income for the bottom 
     20 percent of America taxpayers.
       A 7 percent drop in income for the second-lowest 20 percent 
     of taxpayers.
       A 3 percent drop in income for the middle 20 percent.
       Meanwhile, this 15-year period saw:
       A 5 percent increase in income for the fourth 20 percent.
       An 18 percent increase in income for the richest 20 percent 
     of taxpayers, which was most problematic of all for critics 
     of taxcut policy.
       Once again, however, the use of this 15-year conglomeration 
     produces misleading figures. The data look bad for the poor 
     and middle class on this graph because, once again, the 
     figure lumps in the effects of Jimmy Carter's high-tax, high-
     regulation policies with those of low taxes and low 
     regulation.
       When we separate out the 1979-81 period (fig. 4) from the 
     1982-90 recovery years (fig. 5), we find that everyone got 
     poorer under the high-tax, high-regulation policies of 
     1979-81--the poor much more so and much more devastatingly 
     than the rich. From 1979 to 1981, the poorest fifth 
     experienced a drop in income of 9 percent, the next fifth 
     a drop of 6.8 percent, the middle fifth a drop of 5.4 
     percent, the following fifth a drop of 3.5 percent, and 
     the top fifth a drop of 4.5 percent.
       Meanwhile, when the government lowered taxes and 
     regulations during the 1982-90 period, everyone got richer.
       During the 1982-90 Reagan-Bush era, everyone was better 
     off. The bottom fifth experienced an 11 percent increase in 
     income, the next fifth experienced a 9.7 percent gain, the 
     middle fifth a 10.3 percent increase, the next fifth an 11.8 
     percent rise, and the highest fifth a 17.9 percent increase.
       After the 1990 budget deal, everyone again became worse 
     off. And after President Clinton's retroactive tax hike took 
     effect in 1993, average Americans were hit hard.
       Perhaps some would complain that people with high incomes 
     did even better than other Americans during the prosperous 
     1980s. But government's goal should not be to make all people 
     the same. It should be to allow everyone to become better 
     off. And policies of low taxes and fewer regulations did 
     precisely this.
       It really is very simple: Lower taxes and less regulation 
     help the poor, along with everyone else, while higher taxes 
     and more regulation hurt the poor, along with everyone else.


                               myth no. 2

       What about the notion that we cannot afford tax cuts and 
     that the tax cuts of the 1980s produced the burdensome 
     deficits our economy is staggering under today?
       This myth, unfortunately, has led some in Congress to 
     abandon their commitment to tax cuts in the name of common 
     sense. They now argue that common sense demands that we 
     delay, cut back, or abandon entirely any tax cuts, at least 
     until we achieve a balanced budget.
       In fact, tax cuts can help America achieve the goal of 
     balancing the budget. Tax reductions--particularly those that 
     strengthen incentives to work, save, and invest--increase the 
     rate of economic growth and thereby produce higher tax 
     revenues for the Treasury than would be the case under a 
     high-tax regime.
       It is a paradoxical truth--to paraphrase what President 
     John F. Kennedy said in 1962--that tax rates are too high 
     today and tax revenues are too low. And the soundest way to 
     raise revenue in the long run is to cut the rates now.
       Kennedy was right and for a simple if somewhat unexpected 
     reason: Irrespective of the top marginal tax rate, the 
     government will take in about the same amount as a percentage 
     of gross domestic product (GDP).
       Research by economist W. Kurt Hauser shows that government 
     receipts as a proportion of GDP have continued to hover at 
     19.5

[[Page S3683]]

     percent since 1960. In 1982, the tax share stood at 19.8 
     percent of GDP. By 1989, the tax share had declined slightly 
     to 19.2 percent of GDP--much the same as it had been back in 
     1960.
       In short, whether we have raised or lowered tax rates, the 
     percentage of GDP in taxes has hovered at 19 percent. The 
     issue, of course, is 19 percent of what? Is it 19 percent of 
     a large and growing GDP, or of an anemic, stagnant one?
       Here again, the real numbers destroy the myths and tell the 
     true story. According to the federal Office of Management and 
     Budget (OMB), in 1982, the year the tax cuts were 
     implemented, tax receipts stood at $617.8 billion. By 1989, 
     tax receipts had increased to $990.7 billion.
       How did this come about? By lowering taxes, the government 
     freed up capital and entrepreneurial spirit, creating jobs 
     and wealth and expanding the size of the economic pie. From 
     1982 to 1989, GDP increased from $3.1 to $5.4 trillion. 
     Therefore, while tax revenues as a share of GDP remained 
     relatively constant at just over 19 percent, the dollar 
     amount of tax revenues collected by the federal government 
     rose dramatically, because the economy grew dramatically.
       Tax cuts will increase economic growth and thereby reduce 
     the deficit. The question is, by how much? Economist Bruce 
     Bartlett, a former assistant secretary of the Treasury, notes 
     that the OMB figures show that increases in real GDP 
     significantly reduce the deficit. By the year 2000, the 
     deficit would be diminished by more than $150 billion if the 
     economy grew just 1 percent faster than currently projected 
     over the next five years.
       Of course, Bartlett says, there is no guarantee that the 
     Republican tax cuts will achieve a 1 percent faster growth 
     rate. But there is no doubt they will increase growth above 
     what would otherwise have occurred. If growth is just 0.4 
     percent faster per year it would be enough to make the tax 
     cut deficit-neutral, based on the OMB data.
       Thus, a dispassionate review of the figures shatters the 
     myth that the Reagan tax cuts increased the deficit. The 
     problem was not our revenue stream, either in terms of the 
     percentage of GDP paid in taxes, or in real tax dollars 
     received. The problem was too much spending. From 1982 to 
     1989, government spending rose from $745 billion to $1.14 
     trillion, a 53 percent jump.
       Tax cuts in the 1990s can help produce the same type of 
     economic growth they generated in the 1980s. This growth in 
     turn will help us reduce the deficit. All we must do is 
     reduce the rate at which government spending grows. CBO 
     figures show that, if we simply hold the rate at which 
     federal spending grows to a little over 2 percent per year, 
     we can cut taxes by $189 billion and balance the budget by 
     the year 2002.


                               myth no. 3

       But this reference to tax cuts brings us face to face with 
     another myth, namely, that tax cuts disproportionately 
     benefit the rich at the expense of the poor.
       The myth explodes, however, on contact with IRS data 
     conclusively show that lower income-tax rates actually 
     increase the percentage of the total tax bill paid by the 
     rich while decreasing the tax burden on the poor.
       There is an amazing historical correlation between 
     decreases in the marginal tax rate and increases in the share 
     of revenue paid by the top 1 percent of income earners. And, 
     of course, along with this increase in taxes paid by the most 
     wealthy went a decrease in the taxes paid by the lower 50 
     percent of income earners.
       For example, by 1988, the share of income taxes paid by the 
     bottom 50 percent of taxpayers assumed just 5.7 percent of 
     the income tax burden. Also in 1988, the average tax payment 
     of the top 1 percent of taxpayers amounted to 27.5 percent of 
     the total.
       On the other hand, after the budget summit deal of 1990, 
     the top marginal tax rate was increased from 28 to 31 
     percent. This produced a 3.5 percent decrease in the revenue 
     share paid by the top 1 percent--down to 24.6 percent of the 
     total. That is, as marginal rates decreased, the rich paid 
     more, and as marginal rates increased the rich paid less, 
     leaving more for the middle class and poor to pay.
       Clearly, then, if we want to help the middle class, the 
     last thing we should do is increase marginal tax rates. Such 
     an increase will lead to lower productivity, lower tax 
     revenues from the rich, and an increased tax burden for those 
     who are not rich.
       The answer to our dilemma, then, is not to keep our current 
     high taxes but to cut taxes while bringing spending under 
     control.
       By bringing together disparate kinds of tax cuts, from a 
     $500-per-child tax credit to a reduction in the capital-gains 
     tax rate that will strengthen small businesses and 
     entrepreneurs, we can increase the well-being and 
     productivity of America's middle-class families. These tax 
     cuts would allow middle-class families to build a better 
     future for their children.
       The proposed $500-per-child tax credit directly benefits 
     the middle class. The Joint Committee on Taxation has 
     reported that three-quarters of the benefits from this tax 
     cut will go to people with incomes less than $75,000.
       A capital-gains tax cut will accrue to the middle class as 
     well. IRS data show that 55 percent of taxpayers who report 
     long-term capital gains earn $50,000 or less. And 75 percent 
     of them earn $75,000 or less.
       These tax cuts will bring real relief to America's middle 
     class. They will help the economy and thereby help lower the 
     deficit.
       The 1980s teach us--if only we will examine their lessons 
     properly--that a vibrant economy, spurred by low taxes and 
     fewer regulations, will produce balanced budgets and economic 
     well-being for the middle class. We need only trust Americans 
     to spend and invest their own money as they see fit. We need 
     only trust the people, rather than government, to make their 
     own decisions about how to take care of their families and 
     improve their lot in life.

                          ____________________