GOV. Bill Clinton has revised substantially his economic-policy plan, dropping out about half of his middle-class tax cut and projecting a decline in the fiscal deficit to $141 billion by '96, only $40 billion less than presently projected by the Congressional Budget Office under current law. Projected spending and tax changes reduce the deficit only $15 billion over the next four years, and increased growth apparently accounts for the remaining $127 billion deficit cut.
So a critical question is: Will the revised plan spur growth? The answer is, certainly not, since the plan will in fact reduce incentives and deter growth.
In essence, the new plan includes higher tax rates, higher federal spending, a substantial increase in mandated benefits to be paid by employers, increased regulation of the health-care industry, and support for a thinly veiled industrial policy designed to pick winners and shun losers. I conclude the governor's plan will discourage growth since markets respond to disincentives as well as incentives.
The only evident stimulant to growth includes a "targeted investment credit" and a "50 percent tax exclusion to those who take risk by making long-term investments in new businesses." In both cases, the modifiers suggest selective rather than general application of the stimulants.
Mr. Clinton proposes creating a new, fourth income tax rate of 35 percent or 36 percent, sharply above the present top rate of 31 percent. He proposes a populist "millionaires surtax" and an unspecified increase in the alternative minimum tax, higher taxes on Social Security benefits, and higher medicare taxes. The tax increases are justified by Clinton as "making the wealthiest Americans pay their fair share in taxes."
That specious justification ignores the fact that from 1981-88, the share of federal individual income taxes paid by the top 1 percent rose from 17.9 percent in '81 to 27.6 percent in '88, and the share paid by the top 5 percent rose from 35.1 percent to 45.5 percent while the share paid by middle and lower income groups declined.
He also ignores the results of two recent studies by the United States Treasury and the Urban Institute which refute his contention that the rich have become richer and the poor have become poorer. Clearly the proposed tax increases will adversely affect private savings and investments, encourage tax avoidance, and discourage risk-taking by those subjected to higher rates.
Clinton also proposes increased taxes on American companies that invest abroad and foreign companies that invest here. Those taxes would discourage international investment and would be especially damaging to the US since domestic savings are lower than domestic investment, thereby increasing our dependence on investment flows from abroad. Thus there would be less growth in productivity and real wages, thereby lowering the living standard of US workers.
RATHER than concentrating on increasing private savings and investment as a sure-fire stimulant to growth, Clinton focuses on massive increases in federal spending while ignoring the fact that presently federal spending as a percent of gross domestic product is at a high of about 25 percent. He calls for $200 billion in new federal spending on infrastructure and public works, a huge new national police force, $22 billion in new Head Start spending, $40 billion for higher education, and $4.9 billion in ad ult literacy programs. There are few substantial cuts other than defense.
Sharply higher federal spending not only pulls resources from the productive private sector, but also assures that high taxes are here to stay. High taxes and more government discourages growth by retarding private savings and investment.
Not too surprisingly, Clinton was unable to resist the trend evident in this period of large deficits to increase mandated employer benefits, thereby increasing production costs and discouraging private-sector jobs while making US producers less competitive.
He would "require every employer to spend 1.5 percent of payroll for continuing education and training and make them provide training to all workers, not just executives." The governor would sign into law the Family and Medical Leave Act which provides for 12 weeks of unpaid leave for a newborn baby or sick family member. Finally, he would provide "guaranteed universal access - through employer or public programs - to basic medical coverage."
Clinton does not use the phrase "industrial policy," but he does propose creating "a civilian research and development agency to bring together business and universities to develop cutting-edge products and technologies." The lure of potential profits aided by tax benefits now provide incentives for productive R&D expenditures, but he clearly envisages an expanded role for government.
Although he espouses freer trade, an important generator of growth, he proposes to pass "a stronger, sharper Super 301 trade bill" which would inevitably increase the probability of retaliatory trade action by our trading partners.
In conclusion, I find it difficult to believe that Clinton is serious when he writes, "I believe in free enterprise and the power of market forces. I know economic growth will be the best jobs program we'll ever have." He then proceeds to espouse a program that would inhibit private-sector growth.
It is ironic that as most countries around the world have concluded that large governments inhibit prosperity, Clinton believes that a larger government and higher taxes are the keys to more jobs and higher incomes at home.