Déjà vu All Over Again

Howard Gleckman’s August 4 TaxVox post on tax increases and small business reminds me of the debate over the Clinton deficit reduction proposals in 1993.  Then, as now, a new Democratic President proposed to raise tax rates on the highest individual income taxpayers.  Then, as now, Republican opponents portrayed the proposal as a tax increase on small business that would kill jobs and stop the recovery.  A June 24, 1993, Washington Post story by David Hilzenrath headlined, “Income Tax Hike Stirs a Debate on Jobs Impact; Administration Rejects Claims Small Business Would Be Hurt,” reported, “As the Senate began considering President Clinton's deficit-reduction plan yesterday, Republicans charged that the income tax increase he says is aimed at the rich would hit small businesses and jeopardize their growth.”

Hilzenrath went on to cite then Senate Minority leader Robert Dole (R-Kan), who claimed that “half the tax increase because of the rate increases is going to be paid by small business and they’re not rich.”  And, added, Senator Conrad Burns (R-Mont), “the bill takes away any incentive that small businesses have to create their jobs or even give an excuse to expand.”

In a similar vein, David Wessel and Jeanne Saddler reported in the July 20, 1993 Wall Street Journal that  “a Washington group headed by James Miller, President Reagan’s former budget director … is running ads … that label the tax bill a ‘job tax” that ‘crushes small business’.”

If the charges by opponents of the tax increase sound familiar, so do the Clinton Administration’s then responses.  Hilzenrath reported Assistant Treasury Secretary for Tax Policy Leslie Samuels (who supplied me with the articles I cite) as responding "What the Republicans are saying is what they've always said: Don't tax wealthy people."

Wessel and Saddler noted that “the Treasury doesn’t dispute the fact that well-off small-business owners will pay higher income taxes, just as will well-off bankers, orthodontists, and Exxon Corp executives.”  But “only 4 percent of those taxpayers who report some business income on their tax returns – and that includes partners in law firms and investment banks as well as owners of small manufacturing companies – make sufficient money to be hit by the higher tax rates.”  (The current figure that Howard cites from TPC data is 2.5 percent.)

What followed is well known to everyone.  Congress narrowly enacted the Clinton budget proposals.  The following year, Republicans won control of both houses of Congress, capturing the House for the first time in 40 years.   But the economy boomed.  The 1990s saw one of the strongest economic expansions in U.S. history, with over 20 million new jobs created.  And the federal budget moved into surplus for the first time since 1969. 

We can debate endlessly whether the Clinton tax increases helped promote this recovery or just prevented it from being even stronger.  And today’s economic and budgetary situation is far worse than what the country faced in 1993.  But one thing is for sure – the dire warnings that the 1993 tax increases would “crush small business” and “kill jobs” - never materialized.