“The truth is we will never balance the budget and rid our children of debt unless we cut spending and have real economic growth. And we will never have real economic growth if we raise taxes on those in America who create jobs.”
--House Speaker John Boehner (R-Ohio), May 9, 2011
Speaker Boehner’s speech Monday before the Economic Club of New York earned lots of headlines for his demand that President Obama had to agree to “trillions” of dollars in spending cuts before Republicans would agree to raise the federal debt ceiling.
We’ll admit we are bit late in looking at his speech. Others have poked holes at some of his assertions, notably our colleague Ruth Marcus and the folks at Bloomberg News. PolitiFact.com identified a Pinocchio-worthy claim that Boehner made on television this week about the George W. Bush tax cuts.
Rather than replow this ground, we decided to take a different tack and look at the philosophical underpinnings of his approach to deficit reduction. The headline is in bold letters throughout the speech — NO NEW TAXES! — but what is this based on?
The quote above best exemplifies Boehner’s philosophy: Taxes are off the table, and cuts in government spending will lead to “real” economic growth. His statement would seem to ignore the experience of the Clinton years, when taxes were raised and yet economic growth (and spending restraint) led to a balanced budget and even some drawdown of the debt.
In fact, Boehner avoided any mention in his speech of the Clinton tax hike while blaming (incorrectly) a tax increase by President George H.W. Bush for a recession.
During the debate over President Bill Clinton’s budget plan in 1993, Boehner was a fierce opponent. He delivered the Saturday radio response on June 12, 1993, warning that Clinton’s budget would only increase the deficit. Then, as now, he called for a plan with “no tax increases and true cuts in government spending.”
Fast-forward to today. Boehner spokesman Brendan Buck explains that the declaration this week was a forward-looking vision, not a historical look back. “It was an aspirational statement that reflects the Speaker’s view on what is needed to create jobs and pay off the debt, and is backed up by calculations from the Congressional Budget Office,” he said.
Buck emphasized that Boehner is not calling for new tax cuts, but merely wants to hold rates at the same level they have been for the past 10 years. Buck directed us to a CBO analysis of the House Republican budget plan that shows that, without raising taxes, it would reduce the debt held to the public to just 10 percent of the gross domestic product by 2050, compared to an estimated 90 percent under current policy. (See Table 1.)
Of course, the CBO also warned that the proposed cuts were so substantial that Medicare beneficiaries would shoulder many more medical costs, states would likely cut payments for Medicaid, and all other spending would decline to historically low levels — to 3.5 percent of GDP, compared to an average of 8 percent of GDP since World War II. (See page 19.) Some have argued that much of the burden of these cuts would fall on the poor.
For another source to back up Boehner’s thinking, Buck provided us with a study by the right-leaning Heritage Foundation that warns of the dangers of letting the George W. Bush tax cuts expire. The study notes that, despite claims that the tax cuts drained revenue, the CBO forecast for 2007, made in 2000, was only slightly higher than what actually happened in 2007. “Revenues after the major tax relief legislation between 2001 and 2005 flowed into Washington at nearly the same rate that the CBO expected before any tax cuts were made. Congress was never starved for revenue,” the Heritage report declares.
The Heritage study, however, uses some sleight of hand to achieve this outcome, picking the incorrect year for making the comparison.
The Bush tax cuts were enacted after a CBO forecast in 2001 of a $5.6 trillion surplus, which includes a prediction of $2.82 trillion in tax revenues in 2007. The actual result was $2.57 trillion, or 9 percent less than the 2001 prediction, with most of the decline stemming from a $261 billion decline in estimated individual tax revenues. That’s an 18 percent drop — and represents real money.
Democrats, of course, can point to their own favored studies demonstrating that the Bush tax cuts were an utter failure and led to large deficits. Interestingly, there are also Republicans who argue that the Bush tax cuts were poorly crafted and represented a lost opportunity.
Given the size of the U.S. economy, it is difficult to pinpoint exactly the effect tax cuts or tax increases have on the nation’s well being.
In his speech, Boehner said he was from a family of “Kennedy Democrats” and approvingly quoted from President John F. Kennedy calling for lower tax rates.
But Kennedy only cut the top tax rate from 90 percent to 70 percent, and economic growth was the highest in a five-year period over the last half century. Meanwhile, Bush cut the top rate to 35 percent — half the level in Kennedy’s time—and he was rewarded with the lowest economic growth rate in the past 50 years.
We will close with a fascinating study conducted by Christina D. Romer — who, yes, is the former head of President Obama’s Council of Economic Advisers — and David H. Romer, which attempted to isolate the impact of tax changes on economic activity. The study, which was published last year in the distingushed American Economic Review, attempts to distinguish the reasons why tax changes were implemented and then to determine how much of an impact resulted from the legislation.
The study clearly demonstrates that tax increases have a negative impact on growth. The Romers conclude that a tax increase worth 1 percent of GDP lowers real economic growth by at least 2.5 percent of GDP.
Score a point for Republicans who warn that raising taxes will harm the economy.
However, the study also suggests that tax increases intended to reduce an inherited budget deficit do not harm the economy as much. This might help explain why — despite dire warnings by Republicans such as Boehner in 1993 — the Clinton tax hike was followed by a period of job growth and sustained economic expansion.
Score a point for Democrats who want to at least consider adding some tax hikes in a deficit-reduction package.
The Bottom Line
Boehner this week clearly drew a line in the sand regarding new taxes, based on his philosophical opposition to them. Maybe it is possible to achieve significant deficit reduction with only spending cuts. But the facts are not as clear-cut about the economic impact of some higher taxes in a period of high deficits.