Thursday, February 10, 2011

Clinton-era mythbusting

One of the great myths that has taken hold in American politics is the idea that President Clinton's 1993 tax increase resulted in the elimination of the federal deficit. This is false. Eliminating the deficit wasn't even Clinton's goal, and I distinctly remember seeing charts from the administration at the time that predicted the deficit would shrink for a few years before starting to rise once again. While I have never been able to find these charts, Dan Mitchell provides the following 1995 projection from the Office of Management and Budget, the White House office that oversees the budget:

In other words, not only did the OMB not project a budget surplus in the years ahead, it predicted the deficit to slowly expand even with the tax increases in place. Mitchell notes that the main reason why the deficit was eliminated was not the tax hike, but relative spending restraint:
The Historical Tables on OMB's website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses...Not only was there spending restraint, but Congress and the White House agreed on a fairly substantial tax cut in 1997.
In addition, it has to be pointed out that a rip-roaring economy played a significant role, providing an unexpected big boost to revenue. That said, this still illustrates at least two key lessons: good things happen when the government exercises even a modicum of fiscal restraint and always take long-term CBO/OMB projections with several grains of salt.

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