Heritage Gives Magical Tax Cuts Credit For Economic Growth That Preceded Them

May 26, 2011 2:37 pm ET — Jamison Foser

The Heritage Foundation, last seen claiming the House Republican budget would create approximately infinity jobs, is again peddling bogus numbers in support of its ideologically pre-determined support for tax cuts for the wealthy.

This time, Heritage is out to "prove" that the 1993 Clinton budget "dampened" economic growth, while the 1997 capital gains tax cut led to "significantly higher" growth. But Heritage has a problem: Actual economic growth for comparable periods following the two pieces of legislation shows no such contrast. Reality being an unacceptable impediment to its anti-government crusade, Heritage takes a creative approach to the problem: It assigns credit for growth to legislation that had not yet been signed into law.

In a May 25 blog post, Heritage research coordinator Romina Boccia boldly introduces "The Graph That All Tax Hike Mystics Need to Grapple With." And, indeed, it's a pretty chart:

Average GDP Growth

But maybe you noticed that it's just a little vague on the time periods in question. What does "the four years following the 1993 Clinton tax hike" mean? How about "the four years after the 1997 capital gains rate cut"? The chart doesn't actually specify the date ranges in question; neither does Boccia's blog post, which is based on a 2008 memo by Heritage senior fellow J.D. Foster. Foster's memo is also a bit slippery: It makes clear that the date ranges in question are 1993-1996 and 1997-2000 — but it doesn't actually indicate when the 1993 and 1997 legislation was signed, which obscures the fact that the chosen date ranges are incorrect.

See, the 1993 budget was signed in August, and the 1997 tax cuts in July. By choosing 1993-1996 and 1997-2000 as the "four years following" the respective legislation, Heritage is actually assessing the several months before and 3+ years after the legislation. (Remember: Boccia derides those who disagree with Heritage as "mystics," even as she magically gives the 1997 tax cuts credit for economic growth that occurred months before they were signed. Talk about magical tax cuts!)

As it turns out, playing fast and loose with the uni-directional flow of time stacks the deck in favor of the 1997 tax cuts. That's because growth in the first half of 1993 (which Heritage assigns to the 1993 budget that had not yet been signed) was relatively slow, and growth in the first half of 1997 was relatively strong — but gets assigned to the 1997 legislation that did not yet exist, rather than to the 1993 budget. (As an added bonus, the 1997 tax cuts avoid blame for the relatively poor growth in the beginning of 2001.)

Here's Boccia describing the difference in the two time periods illustrated by her chart: 

Growth in the first half of the decade following the Clinton tax hike was clearly subpar, and real wages actually fell. The economy didn't take off until later in the decade, and not coincidentally after a 1997 Republican-sponsored tax cut. [...] Despite the unusually favorable economic environment during the period, the Clinton tax hikes likely dampened real output [...] Economic growth, measured as real Gross Domestic Product (GDP), was a moderate 3.3 percent in the period from 1993 through 1996 [...] In contrast, the 1997 tax cuts, which significantly lowered the capital gains tax rate, coincided with a period of strong business investment, strong real GDP growth at 4.4 percent.

Now, let's run those numbers again — but unlike Heritage, we'll start the clock in the quarters in which the two bills were signed rather than months earlier. So, for the 1993 budget, which was signed in August, we're looking at the 16 quarters that begin with the third quarter of 1993 and end with the second quarter of 1997. And for the 1997 tax cuts, signed in July, we're looking at the 16 quarters that begin with the third quarter of 1997 and end with the second quarter of 2001. When we do this, the gap, which had been 4.4 percent to 3.3 percent, shrinks to 3.8 percent to 3.7 percent. 

In short: According to Heritage, GDP growth following the 1997 tax cuts was 33 percent better than that following the 1993 budget. But using honest numbers, the difference was only 3 percent.

Oh, one other thing: Heritage's assessment ignores the fact that the 1997 tax cuts came at a time when the economy was already strong, whereas the 1993 budget came at a time when the economy was much weaker: The 16 quarters prior to the 1993 budget averaged only 1.9 percent growth. So, let's see what an honest version of Heritage's chart looks like — and we'll add in the four years before the 1993 budget, too:

Average GDP Growth

When you look at it that way, it's quite a bit harder to say that growth following the 1993 budget was "clearly subpar" and the 1997 tax cuts caused the economy to "take off," isn't it?

Print