The Budget Reconciliation Act of 1993 Essay

The Budget Reconciliation Act of 1993, also referred to as the Omnibus Budget Reconciliation Act of 1993, was a law whose purpose was to reduce the deficit by increasing the rate of taxes and reducing government spending. The Act was passed during the Clinton Administration, and some of the areas which were affected include Medicare, fuel, federal income taxes and social security taxes (Burns & Andrew, 398). The Act leads to a tax increase for individuals and companies as well. Regarding individuals, the number of tax brackets was increased from increased from three to five while new federal income tax rates of 36% and 39.6% were introduced. Social security benefits included in the federal income tax was increased by a margin of 35% (from 50% to 85%). Regarding Medicare, the income cap of $135,000 was eliminated. Regarding exemptions and deductions, the limits and caps on itemized deductions were extended as well as the income-based phase-out of individual exemptions. Regarding fuel tax, it was increased from 2.5 cents per gallon to 4.3 cents per gallon of gasoline. Companies were also affected. The tax rate for companies was increased by 1% (34 to 35) (Godwin 54). All expenses connected to lobbying efforts could not be deducted on federal income tax returns. Lastly, the period for the amortization of goodwill was increased to 15 years. All these measures were done to curb the deficit on US budget.

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Taxes on the wealthiest 1.2% of Americans was increased while 25% of people getting social security payments had to pay taxes on their benefits. These measures had profound effects. The economy grew by 4% (annually) and job employment opportunities increased by 23 million. Through raising taxes on higher-income taxpayers and reducing defense spending, revenue increased considerably, and government spending cut considerably relative to the economy's size (Burns & Andrew, 410). The adopted measures enable the federal budget to be surplus between the fiscal years 1998-2001. The public debt, which is typically considered a benchmark and assessment tool of the national debt, reduce from 47.8% in 1993 to 31.4% in 2001. These measures cut the size of the government, made it less wasteful and made it agiler. The Act policy focused on four main points (Schifferes 1):

• Establishment and formulation of a fiscal discipline that eliminated all budget deficits
• Spur private-sector investment while maintaining the interest rates at a low figure
• Elimination of protectionist tariffs
• Investment in human capital by focusing on education and research

Monetarists argue that the economic affairs of the state were determined by the role played by money and the monitory policies implemented by the government. Supply-side economists argued that impediments to production (such as increasing taxes) had a harmful effect on the economy. They are in favor of government policies aimed at stimulating economic output instead of the redistribution of the existing production. These arguments to reduce taxes were based on the Laffer curve, which established that as the tax rate went up, tax revenue increased, but reached a point that if the rate were too high, the collection would begin to fall (Trabandt, Mathias, & Uhlig, 305). This rationale led to the suggestion that a reduction in tax rates was the best way to increase tax collection because it would reactivate productive activity. This group of proposals received the nickname of "Supply Side Economics."

From time to time, the idea that tax evasion is the inevitable result of high tax-like aliquots is raised by supply-siders. In general, the idea is defended by those who advocate a reduction in the state presence and its best-known broadcaster was Arthur Laffer, who was a member of the Advisory Council on Economic Policy of the Ronald Reagan government in the eighties (Roomer, 770). The position of Laffer, quite simple and ancient was based on the idea that, after a certain level of aliquots, the collection falls instead of rising. It is clear that the idea could have a handle when the rates are very high, but the use of the Laffer curve is to think that it is fulfilled at all levels and, in some cases, it is even thought that a reduction of aliquots is not possible. It will have fiscal effects since it will increase the economic efficiency, the tax base will grow and the desire to pay taxes, according to the postulates of the denominated "supply-side economics."

Supply-siders and monetarists were afraid of the effects of increasing tax rates. Supply-siders economists were of the opinion that economic growth could be effectively and efficiently achieved through reducing taxes and lowering regulation. When taxes are lowered, consumers would have a higher supply of goods and services at relatively low prices. This would, in turn, lead to more employment opportunities for people (Midgley, 288). Supply-siders came up with the Laffer curve, arguing that reducing tax rates when the tax levels were high would increase government revenue since consumers would be spending more resulting in higher economic growth. Supply-side economists proposed that the collective benefit would be reduced when the tax was increased and this would reduce economic output and lower efficiency.

Another concern by supply-siders was that higher taxes would reduce investment and thus lower supply. The decreased aggregate supply would lead to a reduction in the aggregate demand. An increase in taxation would lower economic activity and discourage private investors. Monetarists argued that taxes would act as trade barriers that would make investors and economic participants to lesser effective and efficient strategies to satisfy their wants and needs. Consequently, high taxes would result in lower specialization levels and reduced economic efficiency.

However, all these fears were dispended since income tax revenues increased from $510 billion in 1993 to $994 billion in 2001. There were more job opportunities compared to the Reagan era, and the GDP increased as well. The non-defense discretionary spending reduced from 3.6% to 3.2% from 1993 to 2001 (Godwin, 27). By increasing tax revenues and lowering government spending vis a vis, the GDP shifted the budget from a 2.8% deficit to a 1.2% gross domestic surplus in 2001. Federal spending, which stood at 20.7% GDP in 1993, reduced to 17.6% in 2000 and the subsequent budgets that followed were balanced budgets with surpluses.

The current government in administration can draw several lessons from the Clinton Plan. John Maynard Keynes first stated the idea of increasing taxes and reducing spending in 1937. The main argument against raising taxes is that despite the fact that the plan lowers the public debt, the surplus funds that are paid into social security are used in paying all bondholders, and this is like borrowing from a person to repay another loan, thus raising the overall total debt (Midgley, 290). However, this is wrong. Raising taxes does not slow down the economy. Neither does it reduce worker's wages nor increase the unemployment rate.

The current government has to realize that increasing taxes on the wealthy will most likely reduce any budget deficit and increase the money available to solve most problems. Consequently, more money is saved in the long run. This has no negative implication on economic growth or employment opportunities. Tax increases should not affect the low and middle class since this would make things worse. It should target the wealthiest individuals. The income-tax increase shrinks and reduces the budget deficit, only affecting the wealthy people. Corporate taxes would increase and rake in more revenue.

Monetarists argue that a system of stimulus to savings and investment is no longer necessary because the capital market has developed and because of the financial integration of the economy; which allows access to external funding sources in conditions that are currently very advantageous (very low premium for country risk) (Romer, 794). However, two fundamental things have to be put into consideration before increasing company taxes. The first is that external savings are always limited, a high deficit in the current account makes the economy more vulnerable to tensions in international financial markets and ends up increasing the premium for country risk (Midgley, 287). The second, that even with a more developed capital market, the generality of companies -especially small and medium enterprises (SMEs) - have limited access to it. In effect, due to the information and transaction costs for these companies, they often only have available, with limitations, bank financing; but they cannot resort to issuing debt or shares. Even bank financing is limited, subject to guarantee requirements and relatively expensive. For them, the financing provided by internal funds or reinvested profits is paramount.

A second transmission channel from taxes to investment corresponds to the availability of internal funds to finance it. Given that an increase in the tax paid by companies such as moving to an accrued basis for the taxation of the owners reduces internal funds, retained earnings and the investment is contracted. By the way, this channel will be more relevant for companies that are financially restricted and cannot substitute internal funds for other forms of financing.

When taxes on the wealthy were increased, the whole national deficit was eliminated. Additionally, the economy increased at a high-speed rate leading to suggestions that the prime interest rate should be increased to slow down the rate at which the economy was growing. However, while waiting for Government of today to raise taxes on the wealthiest, it is worth remembering that any fiscal increase will reduce economic growth and that to reduce the public deficit it is not necessary to raise taxes, it is better to cut the spending (Schifferes 1). The Government should raise taxes on the rich so that those who have more are those who contribute more or what is the same will have to raise taxes on savings. A tax system must seek to keep certain considerations: look for equity, be as less distortive as possible and correct for externalities. To all this is added a vital condition: that it be easy to administer and understand the taxpayers. These desirable conditions must be adjusted to the cases of the countries in particular.

Taxes have a longer-term look. Therefore, it is very risky to increase or temporarily reduce taxes because the transitory becomes permanent. For example, selective taxes arise in response to the correction of externalities and in the case of fuels something paradoxical happens: the most polluting fuels pay lower taxes than those that pollute less, which is an aberration.

Works Cited

Burns, John W. and Andrew J. Taylor. "A New Democrat? The Economic Performance of the Clinton Presidency." The Independent Review V.3 (2001): 387-408

Godwin, Jack. Clintonomics: How Bill Clinton Reengineered the Reagan Revolution. Amacom, 2009.

Midgley, James. "The United States: Welfare, Work, and Development." International Journal of Social Welfare 10:7 (2000): 284-293.

Romer, Christina D. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks". Journal of Political Economy. 100: 3 (2010): 763-801

Schifferes, Steve (January 15, 2001). "Bill Clinton's economic legacy". BBC News. Retrieved March 28, 2018.

Trabandt, Mathias and Uhlig, Harald. "The Laffer Curve Revisited". Journal of Monetary Economics. 58: 4 (2011): 305-27.