The Results of Bush's Tax Increase
Posted: Thursday, August 11, 2011
by Jack H. Schick
When the Democratic Congress sent the Omnibus Budget Reconciliation Act in 1990 to President George H. W. Bush, he signed it. It broke his “read my lips” vow that he would not approve new taxes. As many historians now claim, the failure to keep his word and veto the Act cost Bush re-election in 1992.
The Act imposed a 10% luxury tax on private airplanes, yachts, expensive automobiles and jewelry. Senate Majority Leader George Mitchell and Ted Kennedy applauded its passage, saying that the rich would finally be paying their fair share of taxes. Congress said that the luxury tax would raise $31 million additional per year, and come exclusively from the pockets of the wealthy. It didn’t work out that way, though. The rich simply quit spending money on the luxury items.
The United States, which had been a yacht exporter, became an importer as U.S. companies shut down or went into bankruptcy. The jobs sifted to Europe and the Bahamas. The Treasury collected no tax dollars from the sales that were driven overseas. Jobs were also lost in jewelry manufacturing and the aircraft industry. The loss of those jobs cost the government $24.2 million in unemployment benefits and lost income tax.
The Joint Economic Committee concluded that the value of jobs lost in the first six months of the luxury tax was $159.6 million. Realizing it raised no money and that it was a job killer, Congress repealed the Act in 1993, in the first months of the Clinton Presidency.
Congress did not have a grasp of simple economic principles. They did not believe the tenet that people respond to price changes. The only question is how much and over how long of a period they respond. Kennedy and Mitchell and their colleagues assumed the rich would not modify their behavior and buying trends after the tax was imposed, but they did. A lesson should have been learned.
Congress now is again considering imposing a luxury tax on jets and other items. This week the President said again that the rich and the corporations must start paying their fair share. He supports the luxury tax as a way to help reduce the deficit. The argument and professed intention is eerily similar to the arguments in 1990.
Was the lesson not learned? Will Americans behave differently this time? Will a new luxury tax be a revenue generator, this time? It’s difficult to believe that our leaders are so ignorant of economics. It sometimes looks like the rhetoric is simply to inspire envy and resentment toward wealthy Americans and use it as a tool in pursuit of an agenda that includes higher taxes.
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Top-level comments on this article: (2 total)It appears they will never learn Jack. When they see the income from the sources they propose, they assume that they will continue to be at the same level as the figures now show. It doesn't happen. A study of the costs of government, compared to the GDP shows, that even under George W. Bush when the spending increased, the GDP also did and our budget remained almost the same percentage of the GDP for his administration.
With an increase in taxation,you will also see a decline in GDP
A very good article, Jack. Thanks for sharing.Thanks for reading and commenting
Great article Jack. And the last paragraph sums it up very well.Thanks for reading and commenting
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