This is from an analysis published by the Heritage Foundation in 1996:
THE FINDINGS
The comparison of the real and simulated economies suggests that OBRA-93 was not as beneficial to the economy as the White House claims. Indeed, it damaged the economy and living standards in several ways. Specifically, the Heritage analysis finds that:
Economic growth has been slowed.
The economy would have grown significantly faster without the Clinton tax increases and spending reductions of 1993. These policy changes will have cost the economy $208 billion in today's dollars in output from 1993 through 1996, equivalent to nearly $2,100 in lost GDP for every household in America. In 1995, GDP would have grown by nearly 0.90 percent more, or $66 billion in today's dollars, than it actually did. The model forecasts that GDP in 1997 will be 1.0 percent lower than it could be without the 1993 tax hike, or about $95.5 billion in today's dollars.
The pace of business formation has been slowed.
Heritage analysis shows more new businesses would have been incorporated without Clinton's 1993 package. This is due to the relationship between gross domestic product and new business incorporation. In general, for every $1 billion in GDP, about 195 new businesses are incorporated. Thus, the $208 billion fall in GDP due to the 1993 legislation will have prevented the formation of 40,600 new businesses between 1993 and the end of 1996.25
What This Means: The loss of new businesses means not only a loss of valuable entrepreneurs, but also the loss of many new jobs. The Small Business Administration (SBA) estimates that five new jobs are created with each new business establishment. Using the SBA estimate, the loss of 40,600 new businesses between 1993 and 1996 will have meant the loss of 203,000 new jobs.
Job growth has been slowed.
The economy produced 1.2 million fewer private sector jobs between 1993 and 1996 than it would have without the tax increase and budget changes of 1993. President Clinton claims credit for more than eight million new jobs during his Administration, so far, with roughly seven million of these in the private sector. But the Heritage analysis indicates that 1.2 million additional Americans could have been working without his policy changes. If the forecast for 1997 is added to these figures, the total private employment cost of the tax increase grows to nearly 1.4 million.26
It must be noted that the loss of potential civilian employment is one of the more remarkable findings of the analysis, based on the model's design. It is also one of the more controversial. While it is the Heritage Foundation's policy to accept the model's macroeconomic results and assumptions (other than the action of the Fed -- see box, page 8) and not make adjustments in these results through statistical work performed outside the model, this particular effect of OBRA-93 deserves a brief explanation. The model's measurement of how much employment will change when taxes change (the so-called tax elasticity of employment) sits roughly in the middle of the professionally accepted range for such measurements: The model contains a factor of .29 percent change for every one percent change in labor income, and the standard range among economists goes from .12 to .37 percent. These elasticities mean that a 10 percent increase in take-home pay leads to an increase in the labor supply of between 1.2 and 3.7 percent.
The designers of the WUMM model caution users regarding the output of the model's employment equations. However, Heritage economists decided to accept the model's results because further investigations and calculations using other data bases gave general support to the conclusions in this Heritage study. If the rate changes associated with OBRA-93's increases in payroll and income taxes are applied only to the incomes of those with more than $70,000 in income, we calculate that potential employment was at least 350,000. Of course, the increase in tax rates also negatively affected investment decisions, which resulted in slower growth of job-creating new businesses and business expansion. For example, Heritage calculates that the loss in potential capital stock may account for an additional decrease of 470,000 jobs. When these and other capital effects are combined with the direct and minimal employment effects, the calculation derived from the model of 1.2 million in 1996 between actual and potential employment appears reasonable.27 Even using lower elasticities favored by some economists would mean an employment effect of at least 400,000 lost jobs.
What This Means: Heritage calculates approximately 203,000 of the potential lost jobs between 1993 and the end of 1996 were a result of new businesses that were not formed. The remainder of lost potential jobs, some 1 million, most probably results from existing businesses that hired fewer employees than they otherwise would have or expanded less.
The growth in household income and savings has been cut.
When the job losses are combined with higher taxes on working families, a disturbing picture of lost household income growth emerges.
The growth in wages and salaries has been cut. The 1993 legislation will have cut $112 billion, in today's dollars, out of employee wages and salaries between 1993 and 1996, when compared with the pattern that otherwise would have occurred. Extending the analysis to 1997 would mean $162 billion in total lost wages and salaries, again in today's dollars.
What This Means: In 1996 alone, the Heritage analysis shows that the Clinton program depressed the growth in wages and salaries by $46.5 billion in today's dollars, roughly $465 for every household in America. The loss of potential income means that families spent less than they could have spent on food, clothing, transportation, medical care, and other necessities for their families. Indeed, in a typical month, the average household spends $251 on groceries, $160 on medical costs, and $40 on education.28 The addition of $465 in purchasing power for the typical household means an average of 1.8 months of groceries, or 2.9 months of medical bills, or 12 months of educational expenses in a typical year.
The growth in personal disposable income has been cut. The 1993 budget deal raised taxes on millions of American households and will have cut overall real personal disposable income by $264 billion in today's dollars from 1993 through 1996 -- equal to over $2,600 less disposable income for every household in America. In 1996, households will have nearly 2 percent, or $101 billion, less money to spend on education, food, medical care, and other items than they would have had without the 1993 legislation.
What This Means: Total personal disposable income measures both wage income and non-wage income from such things as investments. Besides lost future wages, the Heritage analysis shows that the Clinton tax increase and budget plan will have cost households $152 billion in non-wage income, in today's dollars, between 1993 and the end of 1996. This is equal to $1,500 for every American household. In 1996 alone, the average household will realize $550 less in non-wage disposable income, nearly double the amount the Bureau of Labor Statistics estimates the average household spends on appliances each year.29 Many households use income from non-wage sources to make large purchases such as the down payment on a new car, a washing machine, and other appliances. Alternatively, families may use this income to finance extraordinary events such as weddings, college education, or vacations.
The growth in personal savings has been cut. Between 1993 and the end of 1996, the 1993 budget plan will have reduced personal savings by roughly $138 billion in today's dollars. This cut in family savings means that future consumption of the things for which families save, principally housing and education, will be lower than it would have been. If 1997 is included, savings will have been cut by a total of $192 billion, in today's dollars.
What This Means: The three things households save for most are education, housing, and retirement. To illustrate the impact of these lost savings, Heritage analysts distributed the $138 billion in lost savings to families with children, young families saving to purchase a home, and those saving for retirement, based upon age and population. We then assumed that this amount would grow at an everyday interest rate of 5 percent, to see what important purchases these three groups could make in the future with their respective accumulated savings. Each of the following amounts is what could be purchased with the future value of each group's portion of the $138 billion in lost savings:30
$432 billion for higher education expenses; and
$335 billion for buying homes; and
$3.6 trillion for retirement.
Had the portion of this $138 billion we allocated to families with children been allowed to earn interest for the average number of years available for savings in the under-18 age group, then the cumulative amount could have purchased a four-year college education for 7 million students at $14,000. Had the foregone savings we allocated to young families saving to purchase a home (the age group 18 to 35), been allowed to grow for 18 years, the total sum could have resulted in 17 million future home sales where a $20,000 down payment is required. And had the portion of this $138 billion allocated to people above the age of 35 -- those saving for retirement -- been allowed to grow for the average number of years before this cohort retires, the future value could have resulted in 6.4 million 15-year retirement annuities paying $37,500 per year.
The growth of household wealth has been cut. The 1993 legislation will have reduced the growth of household net wealth by $111 billion from between 1993 and 1996. The WUMM model defines net household wealth as a sum of personal savings, the purchase of automobiles and other durables, the existing household stock of durable goods and personal capital gains.
The reduction in the deficit attributable to the 1993 plan has been small.
The President maintains that taxes had to be raised in 1993 to reduce mounting federal debt.31 He now points to a fall in the deficit as justification for the 1993 legislation. But the Heritage analysis indicates that the weak economy produced by the tax hike will have generated far less new revenue, and thus less deficit reduction, than the Congressional Budget Office (CBO) had predicted for FY 1994 through the end of FY 1996. On the other hand, the analysis indicates that the modest amount of savings predicted from the spending cuts will materialize. These findings suggest that if OBRA-93 had enacted few or no tax increases to slow the economy, but more spending cuts, the deficit would be far less today than it is.
In 1993, CBO predicted that OBRA-93 would lower the cumulative deficits between FY 1994 and FY 1996 by $171 billion. Some $50 billion of these savings -- 29 percent of the total -- was to come from spending cuts, including $17 billion in net interest savings and asset sale proceeds. The remaining $121 billion in deficit reduction -- 70 percent of the total -- was to come from the new revenues generated by the increase in tax rates.
The Heritage analysis indicates that OBRA-93 will have produced just 74 percent of the deficit reduction CBO had estimated, or a total of $127 billion.32 This, however, does not tell the whole story. While the spending cuts will have produced slightly more savings than CBO predicted, $52 billion (excluding asset sale proceeds), accounting for 41 percent of the overall deficit reduction achieved,33 the tax increase accounts for roughly 54 percent of the total, having delivered far less new revenue than was promised.
The Heritage analysis shows that the tax increase will have produced just $68 billion in actual deficit reduction between FY 1994 and the end of FY 1996, just 56 cents of actual deficit reduction for every new dollar CBO predicted would be generated.
However, excluding the roughly $16 billion in new revenues generated by the increase in the motor fuels tax, the analysis shows that the increase in personal and corporate tax rates produced only 49 percent of the new revenues CBO predicted would be generated.
Thus, comparing the actual amount of deficit reduction produced by the 1993 tax hike between 1994 and 1996, with the 1.2 million potential new jobs lost, it can be said that the 1993 tax increase will have meant the loss of over 17,600 new jobs for every $1 billion it achieved in deficit reduction.
The Heritage analysis of the near-term consequences of the 1993 tax increase largely confirms the results of a recent study by noted Harvard University economist Martin Feldstein and Daniel Feenberg, an economist at the National Bureau of Economic Research. Their analysis of the impact of the 1993 tax increase on individual behavior shows that the higher tax rates placed on upper-income taxpayers encouraged these individuals to change their economic behavior and, thus, report lower taxable income. As a result, in the first year it took effect, the 1993 tax rate increase raised just 45 percent of the "revenue that would have been collected if taxpayers had not changed their behavior."34
Moreover, Feldstein and Feenberg discovered that the 1993 tax hike caused considerable inefficiencies in the economy, what economists call "deadweight losses." "This means that for every dollar of additional revenue collected by the government as a result of the higher tax rates, taxpayers experience a decline in their well-being equivalent to three dollars as a result of the induced changes in work, in the form of compensation, and in tax deductible expenditures."35 In other words, conclude Feldstein and Feenberg, "the structure of the 1993 tax increase thus made it a very inefficient way of increasing revenue."36
This analysis so far has examined what might be called the short-term effects of the 1993 package. The current debate is about these short term effects, with the White House claiming benefits to today's economy. But for there to be a complete verdict on the 1993 tax and budget plan, one needs to project into the future, to explore whether the short-term effects analyzed above are merely a prelude to future growth.....
CONCLUSION
While there is good news in the economy, such as low interest rates, low inflation, 8 million new jobs, and lower federal deficits, many workers and their families feel that the recovery is anemic as far as they are concerned. The Clinton Administration is taking credit for good economic news and asserts that the news is a justification of its economic policies; specifically, the 1993 budget deal, which included the largest tax increase in history.
The evidence does not support the Administration's claim that the 1993 budget plan triggered stronger economic growth. On the contrary, the critics of the 1993 legislation appear to be correct that because of it Americans are caught in what some refer to as the "Clinton Crunch," the dual effect of declining real wages combined with higher taxes. The analysis by Heritage Foundation economists, using the WUMM model, indicates that OBRA-93 has had a damaging impact on the nation's economy. Removing the effects of OBRA-93 in an econometric simulation shows that the economy would have been performing better today had Congress not enacted the legislation.
Thus, President Clinton is right to point to the 1993 budget deal as creating today's economic climate. But rather than create a better climate, the legislation has cast a dark shadow over the economy.
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