Taxing the Rich: The Experience of George H. W. Bush and Bill Clinton

Earlier this week the Obama Administration rolled out a new economic forecast that added $2 trillion to deficit projections from 2010 to 2019. The new total is over $9 trillion and many experts believe the President will have to eventually raise taxes on the middle class. The administration is already intent on a significant tax boost for the wealthy, so it useful to review the past results.
The most memorable soundbite from his 1988 acceptance speech at the Republican National Convention was when George H.W. Bush said: “And I’m the one who will not raise taxes. My opponent now says he’ll raise them as a last resort, or a third resort. But when a politician talks like that, you know that’s one resort he’ll be checking into. My opponent, my opponent won’t rule out raising taxes. But I will. And the Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’”
He regretted the strong language four years later when the phrase was endlessly repeated by opponents Bill Clinton, Ross Perot and Pat Buchanan. A tax increase, which included a new top bracket of 31%, was necessary for Bush to obtain the 1990 Budget Agreement. Among those telling Bush to go along with the tax increase were OMB Director Richard Darman, White House Chief of Staff John H. Sununu, Gerald Ford, Paul O’Neill, and Lamar Alexander. The headline of the New York Post the next day read “Read my Lips: I Lied.” Bush was raising taxes rates on the upper brackets mostly by ending their deductions and exemptions. It didn’t work: Individual income taxes brought in 8.3 percent of GDP in 1989 and just 7.6 percent of GDP by 1992.
Even though Bush was breaking his word and this would end his political career, Bush went along with the compromise because the agreement contained deficit reductions and PAYGO. PAYGO required all future spending increases to be offset by decreases. It was thought that this would control all future increases and eventually the deficit would be wiped out.
PAYGO was in effect from 1991 to 2002, and while it sounded great, the Congress had fooled Bush because numerous loopholes were discovered to avoid its restrictions. Discretionary spending was totally exempted from PAYCO. That includes programs such as defense, education, environmental protection or 38 percent of federal spending. Noram increases in entitlement spending are also not covered. Anytime PAYCO presented a problem for Congressional spenders they just waived it. “PAYGO is like quitting drinking, but making an exception for beer and hard liquor,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Former President Bush now says the tax increase was one of his greatest regrets. He did not realize the PAYGO pledge was highly exaggerated and “I should have held out for a better deal.”
In fairness to Bush, PAYGO and statutory budget controls were useful in restraining entitlement increases. The situation would have been worse without them, but PAYGO was not the panacea portrayed by its advocates in 1990.
President Bill Clinton also broke his promise to pass a middle class tax cut but it had little impact on his popularity. The 1990 Budget Agreement did not reduce the deficit significantly and it remained a major issue in 1992. Independent candidate Ross Perot campaigned as a fiscal conservative. He had never held elective office and when his lack of experience was criticized in the presidential debates he responded “I have no experience in creating a $4 trillion debt.” Public opinion polls showed Perot with over 40% of the vote in June of 1992, and if the election had been held at that point Perot would have received a landslide 408 electoral votes. Republicans concentrated all of their fire on Perot in the Spring of 1992 and Bill Clinton was able to use this time to reduce his substantial negative ratings.
Similar to George H.W. Bush, Clinton’s solution to the deficit was a tax the rich plan. This was an essential part of his 1993 tax hike, which is similar to President Obama’s current proposal to raise revenue by increasing taxes on the top 5% of income earners.
No Republican voted for Clinton’s 1993 tax hike which passed the House of Representatives by one vote. It also took Vice President Al Gore’s tie-breaking vote to secure final passage in the Senate. Dozens of Democrats went down to defeat a year later for supporting the tax hike.
According to Dr. Alan Reynolds of the Cato Institute, “Clinton piled on another layer of high tax rates, 36 percent and 39.6 percent, while also greatly hiking taxes on Social Security benefits of working seniors. That failed, too: Individual income taxes brought in only 7.8 percent of GDP in 1993 and ’94, 8.1 percent in 1995. Federal revenues did not get much above the 1989 level until 1997 – when they rose because the capital-gains tax was cut.”
Similar to Bush, Clinton himself later admitted that taxes were increased too much. In fairness to Clinton, his tax hike took place when America was viewed as a low tax nation. Foreign companies were then coming to the United States because our taxes were lower than what they had to compete with at home.
This situation is far different today because so many other nations have now lowered taxes to foster economic growth. There has been no employment growth in places such as Silicon Valley in the last decade because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. This is another reason why President Obama’s tax proposals are unlikely to generate significant revenue.