Economic Report of the President 1994 - The American Presidency ...

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joyed healthy average real GDP growth of 4 percent per year overthe decade of the 1960s, when the top marginal income tax rate onwage and salary income averaged 80.3 percent, but less impressive2V2-percent average annual growth in the decade of the 1980s,when the top rate on wages and salaries averaged 48.4 percent.Also, many people in the United States admired the investment-ledeconomic boom that Japan enjoyed in the 1980s, when that countryhad much higher marginal income tax rates than did the UnitedStates. Obviously, many other important factors besides marginaltax rates determine saving and investment patterns and economicgrowth.DO TAXES CHANGE BEHAVIOR?A central tenet of economics is that relative prices matter. Taxeson capital and wage income change the relationships among thevarious prices that people face when deciding how much to save,invest, and work, and thus have an effect on the way people chooseto allocate their time (between supplying labor and taking leisure)and their income (between current consumption and saving). Thisobservation serves as the basis of the supply-side dictum that a reductionin taxes, by inducing people to work harder and save more,can induce higher rates of investment and economic growth.The extent to which changes in the marginal tax rate on incomeaffect labor supply and saving has been a subject of extensive researchfor many years. The preponderance of evidence seems to indicatethat the changes are small. Saving rates seem to be little affectedby movements in after-tax interest rates, and hours workedand labor force participation rates for most demographic groupsshow only limited sensitivity to changes in after-tax wages.It is undeniable that the sharp reduction in taxes in the early1980s was a strong impetus to economic growth. But it is unlikelythat the principal source of this growth was people reacting to reductionsin marginal tax rates by working and saving more. Theexpansion that took place over the 1980s was tax-induced mainlyinsofar as lower taxes raised disposable income, which led to increasedconsumption. For example, between 1981 and 1986, theconsumption share of GDP increased from 64.5 percent to 67.4 percent.In other words, the 1980s' saw a classical Keynesian, demand-drivenexpansion—not the kind of expansion that supply-sidetheory predicted. Those who would point to the effects of the 1980'stax cuts as evidence of strong supply-side effects of taxation aregrossly overstating the case.The increases in the top marginal income tax rates enacted bythe Congress in 1993 will affect directly only the top 1.2 percentof American families. Moreover, top marginal tax rates remain lowby historical standards. While some individuals may alter their be-88
havior because of the higher tax rates and, for example, cut backtheir hours worked, others may actually increase their work effortin order to meet saving or consumption objectives. Overall, it is unlikelythat the Administration's plan will induce large responses inlabor force participation, hours worked, or savings in the overalleconomy.DO HIGHER TAX RATES INCREASE TAX REVENUES?Some also argue that income tax collections do not vary muchwhen top marginal tax rates increase or decrease. In this view, anincrease in income tax rates provides such a strong incentive forpeople to reduce their taxable income that the tax base shrinks andno additional revenue is generated. For example, a worker facinghigher taxes on wages might choose to take some compensation inthe form of nonwage benefits, such as more vacation time or largerfuture pensions. Similarly, individuals facing higher tax rates onunearned income might change the composition of their savings(while keeping the level constant) by investing in tax-exempt bondsrather than stocks or corporate debt.History can serve as a guide to determining whether these offsettingeffects of a change in tax rates are strong enough to have asignificant impact on revenues. For the United States, contrary tothe supply-siders' claims, income tax cuts have generally reducedincome tax revenues and tax increases have generally raised them.Chart 2-16 illustrates the effect that a number of changes in taxpolicy have had on personal income tax receipts. Several episodesstand out:• The 1964 tax cut reduced the top marginal rate from 91 percentin 1963 to 77 percent in 1964 and then to 70 percent in1965. Income tax revenue as a share of GDP dropped sharply.• The special Vietnam war surtax imposed additional chargesequal to 7.5 percent of tax in 1968, 10 percent in 1969, and 2.5percent in 1970. The result was a sharp increase in revenuesin 1968 and 1969, followed by a decline as the surtax wasphased out.• The 1981 tax cut reduced the top marginal rate from 70 percentto 50 percent in 1982 and cut tax rates for lower incomeindividuals over the 1982-84 period. Since then, personal incometax revenues as a share of GDP have never regained their1981-82 levels. Similarly, the 1986 tax reform reduced marginalrates in stages over 1987 and 1988, and revenues as ashare of GDP in 1988 fell slightly below their 1986 level.In short, evidence from postwar experience strongly suggeststhat personal income tax revenues rise when marginal rates are increased,and fall when marginal rates are reduced.89
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unitedminds
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Economic Report of the PresidentTo
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the Technology Reinvestment Project
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formed health care system, increase
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CONTENTSPageCHAPTER 1. A STRATEGY F
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PageProviding Comprehensive Benefit
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LIST OF CHARTS—CONTINUEDPage3-5 L
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CHAPTER 1A Strategy for Growth and
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which have left consumers and busin
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that growth in both real compensati
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for inflation was on average roughl
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Box 1-2.—Saving, Investment, and
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investments in human capital; inves
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of the income distribution (Table 1
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Box 1-3.—Credible Deficit Reducti
Page 43 and 44: Chart 1-7 Correlation of Investment
Page 45 and 46: Box 1~4*~-A Balanced Budget Amendme
Page 47 and 48: This educational record is not good
Page 49 and 50: fallen markedly since the 1960s (Ch
Page 51 and 52: The development and deployment of n
Page 53 and 54: Earlier rounds of GATT talks had fo
Page 55 and 56: Chart 1-10 Projected Real Growth Ra
Page 57 and 58: are therefore on the public dole. M
Page 59: prise communities and be granted sm
Page 62 and 63: ingredient that should allow the ec
Page 64 and 65: Chart 2-2 National Defense Purchase
Page 66 and 67: Chart 2-3 Growth of U.S. Merchandis
Page 68 and 69: Chart 2-5 Households: Credit Market
Page 70 and 71: THE HEADWINDS ARE MOSTLY CALMINGAs
Page 72 and 73: 1993, real consumer spending increa
Page 74 and 75: RESIDENTIAL INVESTMENTResidential i
Page 76 and 77: smallest annual increase in 20 year
Page 78 and 79: ments with the Internal Revenue Ser
Page 80 and 81: safe-harbor rules for underpayment
Page 82 and 83: Chart 2-9 Alternative Measures of t
Page 84 and 85: Meanwhile, the Mountain States were
Page 86 and 87: inflation is measured by the Blue C
Page 88 and 89: Saving, Investment, and Capital Acc
Page 90 and 91: the future should be reflected in l
Page 92 and 93: Chart 2-15 Dynamic Effects of Defic
Page 96 and 97: Chart 2-16 Personal Income Taxes as
Page 98 and 99: TABLE 2-2.— Administration Foreca
Page 100 and 101: TABLE 2-3.— Accounting for Growth
Page 103 and 104: CHAPTER 3Trends and Recent Developm
Page 105 and 106: first quarter of 1991, nonfarm payr
Page 107 and 108: cause defense cutbacks have caused
Page 109 and 110: UNEMPLOYMENT AND NONEMPLOYMENTThe U
Page 111 and 112: Chart 3-3 Civilian Unemployment Rat
Page 113 and 114: Chart 3-6 Employment-to-Population
Page 115 and 116: Chart 3-8 Ratio of White-Collar to
Page 117 and 118: than would be expected given its hi
Page 119 and 120: that the natural rate is falling? M
Page 121 and 122: SLOW INCOME GROWTHIncome trends hav
Page 123 and 124: Chart 3-10 Average Annual Growth of
Page 125 and 126: Box 3-3.—Consequences of Producti
Page 127 and 128: likely that immigration could expla
Page 129 and 130: We do, however, know how many worke
Page 131 and 132: size. No data are available on vola
Page 133 and 134: BENEFITSOne of the concerns raised
Page 135 and 136: edented partnership to develop a nu
Page 137 and 138: CHAPTER 4Health Care ReformTHE UNIT
Page 139 and 140: make cost-conscious decisions. In a
Page 141 and 142: A third rationale for universal cov
Page 143 and 144: Box 4-1.—Moral Hazard and Adverse
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ies depending on one's health statu
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than people in other countries do,
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sumers are ill equipped to bring st
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By itself, the aging of the populat
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TABLE 4-3.- Sources and Uses of Hea
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about 65 to 70 cents for a typical
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THE ARCHITECTURE OF THE HEALTHSECUR
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etary savings for the Federal Gover
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contribution, within limits. Outsid
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salary income, payments from the em
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TABLE 4-6.—Caps on Premiums by Fi
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An example will illustrate the proc
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TABLE 4-9.—Sources and Uses of Fe
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Chart 4-9 Business Spending on Heal
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Health care reform should set the s
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and private sectors, addressing env
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Box 5-1.—Selected National Perfor
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Box 5-2*—Market PowerFirms are sa
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ate regulation. For example, State
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competitiveness of U.S. industry, a
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Box 5-4.—ExternalitiesAn external
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in the habitat of the spotted owl r
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CLIMATE CHANGE ACTION PLANCertain g
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eral, lays a foundation for broader
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The Administration's proposal seeks
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vances in technical know-how have a
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Investments in R&D are risky. Like
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1950s and 1960s, and American compa
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ico and Lawrence Livermore in Calif
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of industry. MOCs will be affiliate
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tiveness. Again, the hoped-for resu
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forts to cut the massive Federal bu
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TECHNOLOGY POLICY, GROWTH, ANDCOMPE
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mitment to an open international tr
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ses, which take such intersectoral
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An important sectoral development i
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TABLE 6-3.—Stock of U.S. Outward
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technical change has been offered a
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ent account is a broader measure of
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TABLE 6-6.—Intrafirm Trade as Sha
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greater access to the Japanese mark
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the transparency of its trade regim
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that if the states of the former So
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Box 6-3.—Mexican Economic Reforms
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1998, while nontariff barriers on a
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ward convergence in environmental a
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Box 6-4.—The Asian "Miracle"Per c
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Box 6-5.—The Economic Impact of t
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development, and environmental clea
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THE TRADE POLICY AGENDABy lowering
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ignated monopolies. It also establi
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The dollar ended 1993 roughly where
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Box 6-7.—Exchange-Rate Volatility
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Chart 6-5 French Franc-Deutsche Mar
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Besides bringing these endeavors to
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Report to the President on the Acti
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duction budget package, the North A
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Working Group studying cost-benefit
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prepares the Economic Indicators an
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Appendix BSTATISTICAL TABLES RELATI
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POPULATION, EMPLOYMENT, WAGES, AND
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AGRICULTURE:PageB-96. Farm income,
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Gross domestic product
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TABLE B-3.—Implicit price deflato
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TABLE B-4.—Fixed-weighted price i
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TABLE B-5.—Changes in gross domes
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TABLE B-7.—Cross domestic product
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TABLE B-9.—Gross domestic product
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TABLE B-ll.—Gross domestic produc
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TABLE B-13.—Gross domestic produc
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TABLE B-15.—Personal consumption
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TABLE B-17.—Gross and net private
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TABLE B-19.—Inventories and final
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TABLE B-21.—Foreign transactions
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TABLE B-23.—Relation of gross dom
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TABLE B-25.—National income by ty
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TABLE B-26.—Sources of personal i
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TABLE B-27.—Disposition of person
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TABLE B-29.—Gross sating and inve
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TABLE B-31.—Median money income (
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TABLE B-33.—Population and the la
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TABLE B-34.—Civilian employment a
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TABLE B-36.—Unemployment by demog
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TABLE B-38.—Civilian labor force
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TABLE B-40.—Civilian unemployment
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TABLE B-42.—Unemployment by durat
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TABLE B-44.—Employees on nonagric
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TABLE B-45.—Hours and earnings in
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TABLE B-47.—Productivity and rela
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-51.—Industrial production
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TABLE B-53.—New construction acti
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TABLE B-54.—New housing units sta
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Year or monthTABLE B-56.—Manufact
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TABLE B-58.—Manufacturers' new an
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TABLE B-60.—Consumer price indexe
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TABLE B-61.—Consumer price indexe
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TABLE B-63.—Changes in consumer p
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TABLE B-64.—Producer price indexe
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TABLE B-66.—Producer price indexe
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TABLE B-67.—Changes in producer p
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TABLE B-69.—Components of money s
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TABLE B-70.—Aggregate reserves of
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TABLE B-72.—Bond yields and inter
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TABLE B-73.—Total funds raised in
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TABLE B-74.—Mortgage debt outstan
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TABLE B-76.—Consumer credit outst
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TABLE B-78.—Federal receipts, out
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TABLE B-79.—Federal budget receip
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TABLE B-81.—Federal and State and
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TABLE B-83.—State and local gover
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TABLE B-85.—Interest-bearing publ
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TABLE B-87.—Estimated ownership o
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TABLE B-89.—Corporate profits by
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TABLE B-91.—Sales, profits, and s
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TABLE B-93.—Sources and uses of f
Page 384 and 385:
TABLE B-95.—Business formation an
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19481949195019511952195319541955195
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TABLE B-99.—Indexes of prices rec
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TABLE B-101.— Farm business balan
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TABLE B-103.—U.S. international t
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TABLE B-104.—U.S. merchandise exp
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TABLE B-106.—U.S. merchandise exp
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TABLE B-108.—Industrial productio
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TABLE B-110.—Foreign exchange rat
Page 402 and 403:
NATIONAL WEALTHTABLE B-l 12.—Nati
Page 404:
SUPPLEMENTARY TABLETABLE B-114.—S
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