Cutting the Deficit by Cultivating Growth

by Veronique de Rugy

David Leonhardt argues in the New York Times that the most important factor behind the budget surplus of 1999 was economic growth. He gives some of the credit for this to Presidents George H. W. Bush and Bill Clinton and their decisions to raise personal income tax rates:

Yes, the government became more fiscally conservative in the 1990s. Both President George H. W. Bush (who doesn’t get enough credit) and President Bill Clinton, working with Congress, raised taxes to attack the 1980s deficits.

But those tax increases were the second most important reason for the surpluses that followed. The most important was the fact that the economy grew more rapidly than expected. The faster growth pushed up incomes and caused more tax revenue to flow into the Treasury.

But, strangely, he doesn’t ask what triggered the growth at the end of the decade. Here is one answer: the capital gain tax cut of 1997, when Congress passed a tax-relief and deficit-reduction bill and President Clinton signed it. Among other things, the bill lowered the top capital-gains tax rate from 28 percent to 20 percent; established Roth IRAs and increased the income limits for deductible IRAs; established education IRAs and phased in a 15-cent-per-pack increase in the cigarette tax. It is the reduction in the capital-gains tax that should get some of the credit for the economic boom and the surplus that followed.

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