— Rep. Paul Ryan (R-Wis.), in a memo to Republican members of the House Budget Committee, July 11, 2011
Politicians love to cite the lessons of history. But sometimes the wrong lessons are learned — or remembered.
In a previous life, The Fact Checker covered both the 1997 balanced-budget agreement and George W. Bush’s 2001 tax cut. We are frequently amazed at how politicians appear to forget why those bills passed, how they were crafted and what they were intended to accomplish.
Ryan’s citation of the 1997 balanced budget deal — explaining why he thinks that a bipartisan deal on the debt ceiling cannot have tax increases — is an example of this. So too is his insistence in the memo to his colleagues — “Americans are not under-taxed” — that any changes in the Bush tax cuts simply cannot be contemplated now, even though they were scheduled to expire last year.
(Democrats are equally guilty of such historical amnesia, as we demonstrated when we gave Sen. Barbara Boxer Pinocchios for a highly misleading account of the budget surplus.)
Let’s take a trip down memory lane and see what really happened in 1997 and 2001.
The 1997 “balanced budget” agreement was made possible by the gusher of tax revenue that had little to do with Democrats and Republicans — a sudden boom in technology stocks (and stock options) that resulted in an unexpected bounty of capital gains tax revenue.
The new revenue helped bridge long-standing gaps between the two parties over how to eliminate the budget deficit, since little heavy lifting was involved.
Here’s how budget analyst Robert Reischauer, now president of the Urban Institute, described the agreement at the time: “This deal is not mostly about deficit reduction. That is the wrapping paper around the box. The box contains a modest tax cut paid for by modest cuts in [Medicare] provider payments, along with a few other trinkets.”
In fact, except for one year since 1997, Congress has repeatedly put off the planned cuts in provider payments, so even those cuts did not take place.
While Ryan notes that the spending declined to 18.2 percent of the gross domestic product by 2000, he does not mention the other half of the equation: Tax revenue, even with the tax cut, kept soaring until the bubble in technology stocks burst. So revenue, as a percentage of GDP, was 19.2 percent in 1997 and climbed to 20.6 percent of GDP in 2000.
(Today, by contrast, revenue is just 14.4 percent of GDP. Ryan spokesman Conor Sweeney says that’s because of the recession but, let’s be honest, that also in part explains why spending is now 25 percent of GDP. See Table 1.2.)
“You do make a good point that there are differences between these two situations: The unemployment rate was not in excess of 9 percent the last time a Democratic president worked with a Republican Congress to cut spending and reduce the deficit,” Sweeney said. “However, Chairman Ryan does not believe that the fact that millions of American families remain out of work in today’s tough economy strengthens the case to impose trillions of dollars of tax hikes.”
Okay, let’s look back at those 2001 tax cuts.
With revenue soaring in 2000, there was pent-up desire for another tax cut, especially among Republicans. George W. Bush was elected on a pledge to cut taxes, but his plan did not get much traction among Democrats until then-Federal Reserve chairman Alan Greenspan warned Congress of a dangerous new specter — that the government would pay down the national debt and there would be no place to park excess funds. “At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government,” he declared.
Yep, you read that right. The perceived danger was — believe it or not — that there would be no national debt left.
The Congressional Budget Office even predicted that virtually all of the national debt would be paid off by 2006. Greenspan argued that the best way to avoid this pressing problem was through tax cuts, not increased spending.
Greenspan, however, offered caveats and warnings that were largely ignored by Congress. In fact, he said that any tax cuts should have triggers that would halt them “if specified targets for the budget surplus and federal debt were not satisfied.”
In other words, the tax cuts would have been terminated or reduced, depending on the nation’s economic circumstances — precisely the tactic Republicans say is a non-starter in the current debt-ceiling debate. “We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake,” Greenspan said, back when the federal debt was $5.7 trillion. (It is $14.3 trillion today.)
The 10-year, $1.35 trillion tax cut that emerged a few months later was a classic congressional compromise — a hodgepodge of rate cuts and special-interest tax provisions that actually was much larger than officially scored.
Moderate Democrats thought they had won a large victory when they forced through a budget resolution that cut the tax cut from $1.6 trillion to $1.35 trillion. Thus, because the Senate at the time was split 50-50, with Vice President Richard Cheney casting the deciding vote, the tax cut would have to fit within the terms of the budget resolution in order to avoid a filibuster.
But then Republicans cleverly terminated the tax bill after just nine years, meaning they could fit what in effect was a $1.6 trillion tax cut within a ten-year box. (In the tenth year, the predicted revenue loss began to taper off because the tax cut theoretically was terminated.) Few people understood at the time the significance of this shift.
On top of that, no one was really happy with the resulting package, especially conservatives.
“Conservatives view Bush's legislation not as an important economic or philosophical statement that shows what Republicans stand for, the way President Ronald Reagan's tax cut did two decades ago,” we wrote in The Post at the time. “Instead, the Bush tax cut is generally considered a political document, filled with gimmicks and trade-offs that drain it of any real impact.”
As Stephen Moore, president of the Club for Growth, a tax cut advocacy group, put it: “It provides almost zero help for the economy over the next two years and modest help over the next decade.”
Meanwhile, revenue as a percentage of GDP went on a downward slide, to a low of 16.1 percent of GDP in 2004, before bouncing up to 18.5 percent in 2007 before the recession hit, destroying expected tax revenues.
Ryan, in his budget plan that was approved by the House of Representatives, does propose a series of “revenue neutral” tax reforms that he says would simplify the tax code and is designed to limit tax revenue to between 18 and 19 percent of GDP. However, in the first 10 years, revenues do not top 18 percent until 2019 and averages 17.7 percent of GDP during the first decade. (See Table 4.)
Essentially, Ryan’s reforms would be plowed into keeping tax rates low, not for deficit reduction, even though the putative reason for the Bush tax cuts was overtaken by events.
The Pinocchio Test
So, to recap: The balanced budget deal of 1997 is a pretty lousy example of bipartisan cooperation because it came not during a financial crisis but a period of sunny revenue forecast. Meanwhile, the Bush tax cut (which also had bipartisan support at the time) was passed for the wrong reasons, using accounting gimmicks to disguise its size, and had few fans even among tax-cut partisans.
We make no judgment about economic philosophies but merely want to correct the historical record about why revenue stands at its current level. There’s no particular reason why the revenue flow that resulted from that poorly designed tax plan should be the new bottom line for all future tax proposals.
Ryan could have cited bipartisan budget agreements, under Republican presidents such as George H.W. Bush, that increased taxes and cut spending in an effort to cut the deficit during periods of economic stress. (The Bush budget deal, on an inflation-adjusted basis, reduced the deficit more than any other recent effort.) His analogy, while technically accurate, is misleading.
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