In a speech today at the Center for American Progress, Treasury Secretary Tim Geithner will say that the largest tax hike in American history (coming this January) is a return to the "pro-growth" fiscal policies of the 1990s. This is patently absurd. Here is why:
1. The tax rates scheduled under current law and the Obama budget are higher than those of the Clinton years. Everyone forgets that Obamacare imposes a new 3.8 percent surtax on investment income and raises the top Medicare payroll tax rate to 3.8 percent in 2013. That means that the top tax rates on the table are higher than they were in the 1990s:
Obama Current Clinton/ Budget Law GOP Congress Capital Gains 20% 23.8% 23.8% Dividends 39.6% 23.8% 43.4% Majority of Small Business Profits 42.5% 43.4% 43.4%
2. We can't afford to raise tax rates while other countries have been cutting them. The United States has the highest corporate income tax rate in the developed world (39 percent when states are factored in). The average in the developed world is 26 percent. Back in 1995, the developed world's average was nearly 37 percent, and the U.S. level was the same as today. So the corporate tax rate around the world has been slashed, and the United States has stayed the same. We can't afford to raise taxes at the same time as other countries have been cutting them.
3. The capital gains tax rate in the 1990s was going down, but the Obama budget calls for the rate to go up. The GOP Congress and President Clinton signed a capital gains tax cut in 1997, lowering the top rate from 28 to 20 percent. However, the combination of the January 2011 tax hike and Obamacare means that today's capital gains tax rate will rise from 15 to nearly 24 percent.
4. Spending was going down in the 1990s, but it is at record-high levels today. That's why the 1990s had surpluses, and this decade has record deficits. Between 1990 and 2000, federal spending fell from 22 percent of the economy to 18 percent of the economy. Meanwhile, the Congressional Budget Office projects that federal spending this decade will hover around 23 percent of the economy--each and every year, and far above the historical average of 21 percent. Record-high spending is causing deficits this decade, just as spending restraint caused surpluses in the 1990s. Taxes should not be hiked to pay for massive, deficit-causing spending.