The Biggest Tax Increase in History

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Aug. 16 1996 3:30 AM

The Biggest Tax Increase in History

Republicans say that Bill Clinton imposed the biggest tax increase in American history. Democrats disagree, saying Dole himself is responsible for the biggest tax increase in history: a massive tax bill he engineered as Senate Finance Committee chairman in 1982. Who's right? The answer turns on so many metaphysical questions as to be nearly meaningless. Nevertheless, the issue will be central to the fall campaign.

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) fashioned by Dole and the Omnibus Budget Reconciliation Act of 1993 (OBRA-93) pushed through Congress by Clinton were projected, at the time of passage, to raise almost exactly the same amounts of revenue. The Dole measure was estimated by the Joint Committee on Taxation to increase the Treasury's take over the next five years by $235 billion. The revenue parts of Clinton's bill were projected to produce $241 billion over five years. But these numbers need to be adjusted.

Inflation between 1982 and 1993, as measured by the GDP deflator, eroded the value of the dollar by almost a third. Measured in 1982 dollars, Clinton's tax increase would be worth only about $165 billion--$70 billion less than Dole's.

On the other hand, most of Dole's tax increase was actually the partial repeal of future tax cuts that had been enacted in 1981 but had not yet taken place. Despite Dole's bill, taxpayers received more than $375 billion in tax cuts over the following three years. (This did not deter Dole's supply-side critics, led by Jack Kemp, from characterizing his bill as a record-setting tax boost.) Whether repeal of a future tax cut counts as a tax increase is a metaphysical question. If the answer is "no," Clinton's tax increase is larger.

Republicans charge that Clinton promised a middle-class tax cut and delivered a tax increase instead. That is not quite right. A promise to increase taxes on the affluent was, in fact, a central feature of Clinton's 1992 campaign. And almost two-thirds (63 percent) of the projected revenues in Clinton's tax increase hit high-income couples (over $140,000 a year) and individuals (over $115,000). Most of this came from an increase in the top income-tax rate. Another 15 percent of Clinton's revenue came from tax increases on business, primarily a rise in the corporate income-tax rate and new limits on the deduction for entertainment expenses. These also were campaign promises made and kept, not broken. (By interesting contrast, a full 70 percent of Dole's increased revenues came from business, primarily in the form of closing loopholes and ending special favors included in the 1981 tax-cut bill. Clinton's bill, while raising business taxes somewhat overall, introduced a variety of special business preferences.)

Clinton also reduced the income-tax exclusion for Social Security payments to retirees with incomes above $44,000 per couple ($34,000 for individuals). Whether increasing the portion of a government benefit check that the government reclaims in taxes amounts to a payment reduction or a tax increase is another metaphysical question. So is the issue of whether a couple earning $44,000--about one-and-a-half times the median family income--in retirement counts as "affluent."

Clinton's 1993 bill increased the Earned Income Tax Credit for millions of low-income workers. Clintonites wish to count this as a Clinton tax cut. The EITC is supposed to help relieve the burden of payroll taxes (Social Security, Medicare), and is "refundable" (paid in cash) to workers who owe less in income tax than the tax credit is worth. Whether a government check intended to mitigate a tax burden amounts to a tax cut or a spending increase is yet another metaphysical question.

The only part of the 1993 tax bill that directly affected middle-income families was a 4.3-cent-per-gallon boost in the gasoline tax. This cost the average family $45 a year and accounted for less than 10 percent of the total revenue raised. Nevertheless, it was a middle-class tax increase, not a middle-class tax cut. (Although Dole's 1982 act didn't raise gas taxes, only a few months later, Congress enacted a 5-cent-a-gallon increase in the gas tax with Dole's and President Reagan's approval.)

One last metaphysical question. Almost $50 billion of Dole's 1982 projected revenue was supposed to come from cracking down on tax cheats, by adding staff to the IRS, and requiring financial institutions to withhold interest and dividends the way employers withhold wages. (This provision was repealed the next year, before it could take effect.) Is getting people to pay taxes they already owe but would otherwise escape a "tax increase"? In 1982, Bob Dole probably would have said "of course not." In 1996, though, Dole has called the IRS an "intrusive, oppressive presence in American life," and has pledged to cut its staff of investigators. Clinton, meanwhile, has already announced that 5,000 IRS jobs will be eliminated, with more layoffs to come.

Campaign assertions about how much the average family's taxes have increased under Clinton should be regarded with suspicion. (a) Averages obscure the fact that most of Clinton's tax increase did fall on the affluent. The typical middle-class family paid only the new gas tax. (b) Most of the increased tax revenue from individuals reflects higher income, not higher tax rates. (c) As a share of GDP, government now takes 40 cents on the dollar. Rep. Susan Molinari used this figure in her Republican Convention keynote address to illustrate the burden of Clinton's tax increase. But the increase in this figure is due entirely to the rise in state and local taxes. As a share of GDP, federal taxes have been roughly stable under Clinton.

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