Clinton/Gore's economic track-record

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From: Zhang, Yangkun (Yangkun.Zhang@FMR.COM)
Date: Mon Oct 09 2000 - 08:13:13 PDT

Why do people say that Clinton did a "fine job?" Did he do anything for the
economy [aside from screwing interns]? I would posit not--as I believe that
Reagan, Kemp, and Roth (whom we should all thank for the Roth-IRA, but I
digress...) are the ones who created the economic boom, and Newt with his
Tax Reform Act of 1997 (TRA-97) is what sustained it.

Let's get a few misconceptions out of the way, shall we? The left claims
that the Reagan tax cuts of the 1980s gave away the store to the rich, who
ended up paying far less in income taxes. This is not true. Note the
statistics below I got from JEC and IRS--which I reproduce for you below in
this nice table.

Marginal Tax Rates and the Growth of AGI and Tax Paid by High Income Tax

  Real AGI (in Billions) Real Income Tax Paid (in Billions)
Year Top 1% Top 5% Top 1% Top 5%
1980 $253.3 584.3 82.5 158.6
1981 233.5 584.3 79.8 157.6
1985 310.2 701.0 95.7 168.7
1986 365.6 773.7 121.1 200.3
1990 520.2 1026.2 120.9 210.0
1991 471.4 974.7 114.7 201.7
1994 520.2 1049.3 146.7 242.0

Annual Rate of Change
1980-1985 5.7% 3.7% 3.0% 1.2%
1985-1990 11.0% 8.0% 4.8% 4.5%

Source: Internal Revenue Service, Statistics of Income: Individual Tax
Returns, (various issues). The personal consumption expenditure component of
the GDP deflator was used to convert the nominal data to real 1992 dollars.

Clearly, in the 1980s, tax revenue for the top income earners not only did
NOT decrease, but actually increased. I left out the numbers for the bottom
75% and 50%, but needless to say, both the tax base as well as tax revenue
increased, though not nearly as much. Okay, AGI is wonderful--what about
capital gains taxation?

Now take a look at

Note the spike in capital gains tax revenue for the Reagan years?

And quoting the House JEC report on capital gains taxation [issued in 1997]:

"The historical evidence suggest that capital gains tax reductions tend to
increase tax revenue. When capital gains tax rates were lowered in 1978 and
again in 1981 [note that both cuts were led by Jack Kemp--Dole's running
mate in 1996], revenue climbed steadily. Conversely, when the tax rate was
increased in 1987, revenue began declining despite forecasters predictions
it would increase. For instance, capital gains tax revenue in 1985 equaled
$36.4 billion after adjusting for inflation, yet $36.2 billion was collected
in 1994 under a higher tax rate. In other words, tax revenue in 1994 was
slightly less than it was in 1985 even though the economy was larger, the
tax rate was higher, and the stock market was stronger in 1994."

So, scratch myth number 1--that the Steiger Amendment and the
Roth/Kemp/Reagan tax cuts gave away the store to the rich. It DID grow the
economy and DID increase the tax base just as Reagan claimed. Reaganomics
was NEVER voodo economics.

The Kemp-Roth bill that then ultimately became the Reagan 1981 tax cut
stimulated the economy. You can debate who the rich are and who it helps,
but the fact is that its primary interest is that it helps the people who
want to get rich--in particular the entrepreneurs which are the absolute key
to the economy these days. You can retrace the history. The capital gains
tax was cut in 1978--the Steiger Amendment--very shortly thereafter there
was a great profusion in the venture capital industry and the start of a lot
of new firms. The 1980s is just an amazing record of firms started by
college dropouts and illegal immigrants and so on. In 1981 the top personal
rate was cut from 70% to 50%. Again tax rates were cut in 1986 to a 28% top
rate. Some hated tax cuts, claiming only the rich benefit - which is but a
smoke screen for reality - - "Most studies find the share of tax income
generated by the highest-income Americans rose after both the 1981 and 1986
tax cuts." (The Economist, pg. 75, 1/24/98). Hell, don't believe the
Economist, which you may believe is a bastion of conservatism--look at the
stats I got from the IRS! So can someone please explain to me what was
"voodoo" about Reaganomics?

Not everything was perfect under the Reagan administration--between June
1981 and December 1986, taxpayers were allowed to exclude 60 percent of
capital gains from taxation. However, the Tax Reform Act of 1986 (TRA-86)
eliminated this exclusion, raising the maximum capital gains tax rate from
20 to 28 percent, a 40 percent increase. The increase was largest for middle
income taxpayers, whose tax rate increased from 8.7 to 15 percent, a 72
percent increase. Subsequently, capital gains revenue dropped significantly
in 1987 (note from the graph above ). Though I can't prove it, I posit that
TRA-86 was at least partially responsible for the crash of 87. Fortunately,
Reagan also nominated Greenspan, who handled the 87 market crash adroitly by
pumping extra liquidity into the market. Incidentally, Newt fixed the errors
that occurred under Reagan with TRA 97, which became effective for gains
realized after May 6, 1997--taxpayers now pay a lower rate on all long-term
capital gains than on their ordinary income.

TRA 97 did the following for long-term capital gain more than one year:

15% for taxpayers in the 15% income tax bracket;
28% percent for other brackets.

10% for taxpayers in the 15% income tax bracket;
20% percent for other brackets.

Apropos, TRA-97 also cuts the long term gain rate for equity held for more
than 5 years after Jan 1, 2001 to 18%.

Now that we've got the numbers settled. Why did the Kemp/Reagan tax cuts
work? Because capital gains taxation is so economically inefficient--because
of its punitive effect on entrepreneurship, thrift, and investment--that the
optimal economic policy for the United States would be to abolish the tax
entirely--which will never happened, but then again, I would have voted for
Dole/Kemp. To quote someone more eloquent than me:

"The tax on capital gains directly affects investment decisions, the
mobility and flow of risk capital . . . the ease or difficulty experienced
by new ventures in obtaining capital, and thereby the strength and potential
for growth in the economy." --President John F. Kennedy, 1963

Clinton simply took the helm over an economy that was growing and
vibrant--if he simply sat on his ass, did nothing but screw some intern (not
that I mind--it's his right--though I wish he'd have picked a 90s version of
Marilyn Monroe instead), the economy would have continued to boom. Reagan,
on the other hand, took control of an economy that was in shambles and a
nation that was in the nadir of despair. Whose fault was that? It is
Carter's fault, as Jimmy Carter's $50 rebate was designed merely to change
aggregate demand; it would change the average or effective tax rate, but it
changed no incentives, except perhaps for the worse. It is Richard Nixon's
fault, declaring that "We are all Keynesians now" in 1971 just as Keynesian
was collapsing and macroeconomics was collapsing with it; Nixon's disastrous
economic policies (remember price controls?) following the collapse of
Bretton Woods left a problem that Carter was ill-prepared to handle. It is
LBJ's fault, for pursuing both guns and butter--both the questionable costly
in Vietnam and the War on Poverty. The legacy of LBJ was that they lessened
work incentives all the while destroying the value of the dollar (though the
full effect, such as the rise of commodity prices such as oil, was not seen
until the post-Bretton Woods era under Nixon and Carter). Both Democrats and
Republicans nearly ran the American economy into the ground with an
unworkable economic theory--i.e., Keynesian Economics. As Prime Minister
James Callaghan, head of Britain's Labor government, put it succinctly in
the WSJ in January 1977: "We used to think that you could spend your way out
of a recession ... I tell you, in all candor, that that option no longer
exists, and that insofar as it ever did exist, it only worked by injecting
bigger doses of inflation into the economy followed by higher levels of
unemployment as the next step. That is the history of the last twenty

Reagan managed to put a stop all this. He had the guts, resolve, and
intellect to listen to a then new idea--an idea Robert Mundell (who was to
win a Nobel Prize for his work in 1998), Art Laffer (the inventor of the
Laffer Curve), and Jude Wanniski formulated--whom Herb Stein coined the
"supply-side fiscalists" in 1976. What is the idea? That "supply creates its
own demand. That is, manufacturers pay workers to make widgets, and workers
use their pay to buy widgets. Savers lend their money to investors who build
widget factories, and the factories' profits go to repay principal and
interest. A higher price will call forth more widgets, higher wages will
call forth more widget-makers, and higher returns will call forth more
investment. Unless the government gets in the way (e.g., by fixing prices),
markets will clear and everyone will live happily ever after." You can say
what you will
about "supply-side fiscalism", but the fact is that nothing else up to that
point had worked.

Add to this the idea of the Laffer Curve: "a tax of zero obviously raised no
revenue, while a tax of 100% would extinguish the taxed activity and thus
also raise no revenue. There must be a curve connecting these two extremes,
and the curve must peak somewhere. Below the peak a higher tax will raise
more government revenue, but beyond the peak it a tax cut would actually
increase revenue. Laffer called this 'the prohibitive range.' In extreme
cases, that is, a lower rate could expand the tax base so rapidly that the
'reflow' could exceed 100%."

Recognizing both ideas, Reagan got to work, and by 1983, the American
economy was in full expansion, pulling itself out of some three decades of
economics ignorance and neglect. If that isn't what leadership is about, I
don't know what is!

As for the left's claim that social inequality increased. Well, there are
statistics, and damned statistics.

The common statistical method that the left use--i.e., measure the bottom
20% (or quintile) in 1980, then measure again in 1990, and so on, as
compared to the top quintile--is inheritently flawed. Any operations
research major will tell you that unless you control for the population, the
numbers doesn't mean a damned thing! And the top and bottom quintile doesn't
account for population shifts. Case in point, we have 4 people, making $20,
$30, $40, and $50 thousand a year, the average annual salary of our
population is $35,000 with the bottom quintile at slightly more than
$20,000. Add another person (due to immigration, say, from Mexico) who makes
$10,000 a year, and the bottom quintile has just dropped to $10,000, with
the average now at
$30,000! Yet the original people in the country are no worse off! But I can
just see the headlines--"The Poor Gets Poorer In America Under Reagan/Bush".
Remember, during the 1980s, Reagan let in many poor students from former
(and in China's case, current) communist countries as a gesture of
good-will. Add to that the plethora of immigrant who came from Mexico and
other Latin-American countries, and what you have is a huge influx of people
into the bottom quintile. It doesn't mean that existing Americans are any
worse off--only that our vibrant economy is attracting the poor from other

Yet another statistical error that the left propagate is the whole matter of
inequality. Let's use an simple example of five people who makes $100,000 a
year. We have no inequality, everyone makes the same amount. Let's now say
that one guy decide to start a company, gets non-qualified options, and
exercises $100,000 of them the next year. Since non-qualified options counts
as regular income, it shatters our utopia! Now one person's adjusted gross
income (AGI) is now $100,000 over everyone else! 'How can this be?" The
liberal would cry aloud. "Income Inequality Exacerbated Under Reagan/Bush",
the headlines would scream. But really? Was anyone any worse off? Again, the
answer is no!

Now for some real stats, where population is actually accounted for. An
University of Michigan's Panel Survey on Income Dynamics tracked over 3000
people from 1975 to 1991. After 17 years, only 5% of bottom quintile were
still in the bottom. That means 95% moved up--over half made it to the
middle-class quintiles and 29% were sitting plumply in the top fifth. Plus,
the data suggests that once a person has reached the top, he or she has a
good chance of remaining. Moreover, these upwardly mobiles really zoomed.
Rock-bottom-dwellers in 1975 saw an average gain in real income of $25,322
by 1991 while top-dwellers, in contrast, were only $3,974 richer. By the
way, the Michigan data shows that more than 75% of the second lowest
in 1975 had marched into higher quintiles by 1995--26% rocketed all the way
to the top. Indeed, chances are that Mr. Gore's typical country club duffer
"drinking scotch and looking out at the golf links" was not to the club
born. The U.S. Treasury, using entirely different data, tracked 14,351
households from 1979 to 1988. Over this nine-year period, the survey found
that 86% of those in the lowest income bracket moved up, two-thirds into the
middle class and almost 15% into that piggy top quintile. Statistics aside,
I came into this country in the bottom quintile during the Reagan years, and
now am in the top quintile.

The poor getting poorer? Say again?

As for Jim's claim "Venture capital growth had everything to do with the
opportunities provided by the Internet, and nothing to do with Congress", he
is unfortunately, dead wrong. Remember TCI? MCI? Sprint? What about
Turner/CNN? All the funding for these companies came during the Reagan
administration AFTER the Roth/Kemp tax cuts (with junk bonds no less). And
can you seriously tell me that without MCI and Sprint, the modern Internet
would have taken off the way it did? So, repeat after me, boys and girls:


Yangkun Zhang
Fidelity Management & Research
82 Devonshire St. - Mail Stop E19D 
Boston, MA  02109-3614

-----Original Message----- From: Jim Whitehead [] Sent: Friday, October 06, 2000 4:06 PM To: FoRK Subject: RE: Debate whoppers

> And Clinton/Gore's economic track-record is spotty at best.

Wow, after one of the most incredible economic booms of the 20th century, I'm amazed you can say this with a straight face.

Although, to be honest, I don't think either the executive, or the legislative branch can take too much credit for the boom, except that they had the sense not to screw it up. The Fiduciary branch (i.e., the Fed) deserves much of the credit. But, of course, since the Fed is a non-partisan body, giving it credit doesn't provide much ammunition for party-bashing.

> In the end of > this tenure, the political marketplace gave the Republicans control of > Congress for the first time in 40 years, and with it, venture capital grew > at an astonishing rate.

Oh, please. Venture capital growth had everything to do with the unique opportunities provided by the Internet, and nothing to do with Congress.

What makes you think that the executive or the legislative branch have much control over the economy at all? Their control levers are rough and small, at best. Even the Fed has very coarse mechanisms for tinkering with the economy, and affecting the money supply is much more direct than anything Congress or the President has available.

- Jim

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