Hoisted from Comments: Land Transport in 1776
Lisa Shiffren Drives Matthew Yglesias and Commentors Shrill!

A Historical Document: Paul Gigot of the Wall Street Journal Predicts the Failure of Clintonomics

One evasion in Ken Auletta's piece on the Wall Street Journal stands out: his quoting without comment of Norman Pearlstine's claim that Paul Gigot “was a first-rate reporter...”

Here was my first encounter with Gigot's reporting--in this case, reporting on me, one of the heads of Alicia Munnell's staff at the U.S. Treasury in 1993.

Damned if I know what Paul Gigot is talking about when he says of my boss that: "Alicia Munnell is in denial, even though her staff has calculated that Mr. Feldstein is right." I think "Mr. Feldstein is right" might mean "upper-bracket tax collections fell in fiscal 2001 (because of the recession)," rather than what Gigot wants you to think it means--that "the tax-rate hikes of 1990 discouraged work and put us on the far side of the Laffer curve."

If that's not what Gigot means, he's making s--- up: I was there, I was Alicia Munnell's staff, and I know:

Oops! Weren't We Going to Soak The Rich? By Paul A. Gigot 908 words 9 July 1993 The Wall Street Journal: On his way out the door in January, a cheeky Bush official scribbled the same tax phrase again and again on a Treasury blackboard for the new Clinton team: "Low rates, broad base." The incoming Clinton Treasury minions, more rueful than cheeky, erased the phrase each time the new White House requested ever higher tax rates. Mark the rueful down as prophets. The first evidence on income-tax receipts for 1991 is now rolling in from the Internal Revenue Service, and the usual eye-glazing numbers are suddenly eye-popping. To wit, the rich paid less in taxes even though their tax rates went up. The nonrich paid more even though their tax rates stayed the same. President Clinton, meet the Laffer Curve.

This news is the elephant in the room of this year's tax debate, since we keep hearing that the fate of the world hangs on President Clinton's promise to reduce the deficit by "$500 billion." Most of this windfall, Mr. Clinton assures us, will come from "the rich." But what if those tax revenues from the rich turn out to be a mirage? Then isn't the Clinton tax program doomed to fail, even as mere deficit reduction? And shouldn't Democrats think again before they commit tax hari-kari at next week's House-Senate conference? Of course they should, but this year's Democratic theme song seems to be that old "MASH" movie anthem, "Suicide Is Painless."

The 1991 numbers are so striking because they're the first since the Great 1990 Budget Deal, which was more or less the test drive for Clintonomics. Rates had to be raised on "the rich," we were told then, in order to produce a river of new tax revenue. Well, this is one river that didn't run through it. For we now know that total income-tax receipts fell in 1991, the first decline since 1983. And they fell in a strange and revealing way, as the chart below shows. For the rich -- defined as the top 850,000 income-earners in each year (making about $200,000 or more) -- 1991 tax receipts fell by $6.5 billion, or 6.1%. But for everyone else, tax receipts actually rose in 1991 -- by $3.3 billion, or 1%. This odd dichotomy makes it difficult to attribute the revenue decline merely to a slow economy: The rich wouldn't have a bad year if everyone else had a good one. And, in fact, total income rose 3.3% for the year.

So what happened to the rich? It's impossible to know for sure, but the likely answer is that they changed their behavior in response to higher rates. Maybe they sheltered more income. Or stuffed more of it into 1990 to take advantage of that year's lower rates. Or perhaps they worked less. In short, they responded to "incentives," as economists say, and produced less income subject to tax. This reverse-windfall is underscored by other 1991 numbers. Income from businesses fell 5.5% for the rich, but rose 2.2% for the nonrich. For so-called Subchapter S small businesses, which would get slammed again by Mr. Clinton, income dove 10.5% for the rich but rose 6.2% for everyone else. All of which proves what populist, middle-class free-marketeers like me call the paradox of progressivity: To really soak the rich, keep their tax rates low.

Listen to Martin Feldstein, the Harvard economist who has never been mistaken for a wild supply-sider: "The evidence is strong that in 1991 they picked up rates at the top and revenue fell. This should make Democrats think twice about whether the tax rates they're now talking about will raise the revenues they expect." Mr. Feldstein figures they'll get only about a quarter of the $25 billion a year they advertise.

The Clinton administration knows all this, by the way, but wants it kept quiet until the tax bill passes. Treasury economist Alicia Munnell is in denial, even though her staff has calculated that Mr. Feldstein is right. Treasury's Larry Summers knows better, but is preoccupied with Japan and trade. Other Democrats don't even want to hear about it. That's because for them taxing "the rich" is about class-war politics, not revenue. It's about having a foil to run against. But that's no excuse for Republicans, who've been just as silent about all this. Bob Dole's timid Senate Republicans didn't even offer an amendment to strip the higher rates out of the tax bill. Ohio Rep. John Kasich, supposedly the boy wonder of the budget, has made people wonder by endorsing higher rates. Like George Bush and Nicholas Brady, too many Republicans are still afraid James Carville might accuse them of belonging to a country club.

But now is the time to lay down markers for the next economic debate, educating voters about the con job they are about to experience. An optimist said last year that either the Clinton presidency would be successful, or it would be educational. But that assumes someone does the educating.

Life Imitates Art: (That is, economist Art Laffer)

Income tax payments (in $ billions)
1991 1990
"The Rich" $ 99.6 $106.1
Everyone Else $ 348.6 $345.3