A primary goal
the Clinton plan is to reduce the federal deficit.However, we find that the effects on the deficit will be minor. Revenue will be less than theadministration predicts for two reasons:
In the face
higher tax rates, taxpayers will engage intraditional tax avoidance behavior and (2) slower growth automatically lowers tax revenues. Althoughthe administration forecasts almost $500 billion in deficit reduction by 1998, $174 billion will nevermaterialize due to the adverse economic effects. Moreover, the national debt will grow faster than grossdomestic product (GDP). Higher state and local deficits will also circumvent the goal
lowergovernment borrowing. The combined deficit reduction
both federal and state and local governmentswill be about 40 percent
that claimed for the bill. [ See Table III.]
Relation to the 1990 Budget Summit Agreement
The rules currently governing the federalbudget were established in a 1990 budget agreement, which resulted in the Omnibus BudgetReconciliation Act (OBRA). This was the agreement under which George Bush broke his promise not toraise taxes. In return for higher immediate taxes, spending cuts were promised in later years. However,President Clinton has counted the OBRA savings for 1994 and 1995 in his savings. Clinton's refusal tohonor spending cuts under OBRA has the effect
increasing the cumulative federal deficit baseline,allowing him to claim more savings than the bill delivers.
Overall Economic Effects.
the Clinton plan is to increase the economicwell being
middle-income families. However, because the plan would cause lower economic growth,the average family would be much worse off. Specifically:
The Clinton plan will cause annual gross domestic product to be $244 billion lower than itwould have been by 1998.
This economic loss is equal to almost $1,000
year for every man, woman and child in the
or about $2,500
an average household.
A major goal
the Clinton plan is to redistribute the tax burden by raising taxrates for wealthier taxpayers. However, since wealthier taxpayers tend to receive most
their incomefrom investments, Clinton's higher tax rates are mainly aimed at investment income. Although theClinton plan may be good politics -because it punishes a very small percent
voters -it is badeconomics because it targets a large portion
investment and entrepreneurial income, as shown inFigure II. Specifically:-more-