Bill Clinton riffed his way out of a jam
A taxing lesson for Donald Trump
One month into his presidency in 1993, Bill Clinton set forth a detailed set of plans. “It is nice to have a fresh excuse for giving a long speech,” said Clinton, drawing laughs from a joint session of Congress.
It was indeed a long speech — one hour and five minutes — though about 35 minutes shorter than President Donald Trump’s address to Congress in March of this year.
The laughter in the House chamber harked back to Clinton’s debut on the national stage: his rambling 33-minute discourse to the 1988 Democratic National Convention. On that night, Chris Wallace, then an NBC reporter, proclaimed that the Arkansas governor “has completely lost this crowd” and “has overstayed his welcome.”
It was only through an appearance on the Johnny Carson show a week later that Clinton salvaged his career. The comedian put an hourglass on his desk as they started to chat, but the governor’s self-deprecating humor, plus his saxophone rendition of “Summertime,” restored Clinton’s standing as an up-and-coming Democrat.
The improvisational talent revealed in his playing of the Gershwin standard would serve him in good stead as president. Critics would call Clinton an opportunist, but from our current vantage point, there’s virtue in a president willing to discard policies that aren’t working.
About-face
The most important part of the 1993 speech before Congress was not its length, but what it proposed: Along with promises to cut waste in government, Clinton floated a sharp increase in taxes on high earners.
It was an about-face from the Reagan-era tax cuts that had brought the highest tax bracket down from 70% to 28%. Clinton succeeded in raising rates through passage of a tax bill by the narrowest of margins — without a single Republican vote and with Vice President Al Gore having to cast a tie-breaking vote in favor on two occasions.
This year, Trump is trying to achieve a feat of almost equal difficulty, but in the opposite direction, seeking virtual Republican unanimity for a tax-reducing bill. It would not only prolong his first-term tax cut but would add extra cuts, by making tax free any income earned from tips, overtime and social security.
Now that Trump’s chaotic first 100 days are coming to an end, you can expect a growing focus on whether he will be able to achieve this legislative priority.
The common theme between the Clinton and Trump tax bills is not only the partisanship of the votes but also the specter of the surging national debt. Only now, the U.S. is in much worse shape than in the early 1990s. The debt, which was then at $4 trillion, is now at $36 trillion—and rising fast.
‘Read my lips’
It was actually Clinton’s predecessor, Republican President George H.W. Bush who began the retreat from the extreme tax-cutting under President Ronald Reagan. Bush declared at the 1988 Republican National Convention that “I’m the one who will not raise taxes.” Saying Congress would one day push him to increase the rates, Bush promised, “I’ll say to them, ‘Read my lips: No new taxes.”
Yet, when such an event happened two years later, Bush thought he had no alternative but to try to tame the growing budget deficit, even if tax rates had to go up as one part of the package.
The highest tax rate went from 28% to 31%, some deductions were limited for high earners and payroll taxes increased. The “Omnibus Budget Reconciliation Act” reduced the deficit by $740 billion.
‘Forgotten middle class’
Clinton launched his campaign for the White House in 1991, focused on “restoring the hopes of the forgotten middle class,”, as Bob Woodward wrote in The Agenda. He promised them a 10% tax cut, with wealthier taxpayers (those earning more than $200,000) paying for it.
Yet the tax cut bombed on the campaign trail. Clinton came under attack for pandering to the voters. And businessman Ross Perot entered the race with a strong focus on cutting the deficit.
“The deficit problem had never been central to Clinton’s vision,” Woodward wrote, “but the Clinton team now realized they were obliged to include specific deficit reduction goals in their overall plan. Unfortunately, Clinton’s campaign pledges—new investments, a middle-class tax cut, a stimulus of fast-track spending to jump-start the economy, and health care reform—were expensive and could increase the deficit.”
Clinton promised to halve the deficit by the end of his first term and altered his middle class tax cut to give families with children the option to take a tax credit instead.
In November, 1992, Clinton won a plurality of the popular vote in a three-way race against Bush and Perot, and it was enough for him to score a decisive win in the Electoral College. But Perot’s 19% share of the popular vote showed the power of deficit-cutting as an issue.
Greenspan’s advice
After the election, Fed Chairman Alan Greenspan flew to Little Rock to meet with the incoming president. He argued that shrinking the deficit was crucial to controlling inflation, lowering interest rates, powering the economy and juicing the stock market.
Woodward described Greenspan’s message this way: “If Clinton’s economic plan were not credible with the bond markets, an effort by the Federal Reserve to lower short-term rates would likely backfire, he said, and drive up long-term rates. The market these days was too sophisticated to be fooled.”
But other advisers told Clinton that the political dividends from deficit reduction could be a long time coming, a caution the new president didn’t appreciate: “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?” he said at one strategy session.
Two days before his joint session speech, Clinton addressed the nation from the Oval Office and admitted that he would be reneging on his promise of a middle-class tax cut. “I’ve worked harder than I’ve ever worked in my life to meet that goal,” he said. “But I can’t.” Clinton blamed the tax cuts of the ‘80s for spawning the deficit monster.
The intimidating bond market
After Clinton’s speech to Congress raised the prospect of higher government revenue, the bond market demonstrated its approval—interest rates started falling.
“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter,” Clinton campaign strategist James Carville said. “But now I want to come back as the bond market. You can intimidate everybody.”
The tax increases, which raised the highest rate to nearly 40%, didn’t quiet the budget debate, especially not with House Speaker Newt Gingrich frequently warring with Clinton. In 1997, a bipartisan budget deal between the White House and Congress delivered significant spending cuts.
Politically, the second-term President Clinton was wounded by the scandal that resulted from his affair with a White House intern. But economically, starting in 1998, Clinton presided over a balanced budget, the first time that milestone had been reached since 1969.
Linda Bilmes, a Clinton-administration staff member and now a lecturer at Harvard, said the tax increases were crucial to eliminating the budget deficit, along with lower defense spending as a result of the demise of the Soviet Union. “Clinton’s balanced-budget recipe was a mixture of higher revenues and lower spending, with help from a booming economy,” she wrote.
Clinton was president as the economy boomed and stock prices rose in the “dot-com bubble, which brought in hundreds of millions in unanticipated tax revenue from taxes on capital gains and rising salaries,” according to Factcheck.org.
One brief shining moment
As researcher Seito Hayasaki of Japan’s Keio University pointed out, Clinton basked in the glory of a balanced budget: On September 30, 1998, the president said, “It is a landmark achievement not just for those in this room who have played a role in it but, indeed, for all the American people. And it will be a gift-giving achievement for generations to come.”
The Congressional Budget Office projected that the entire national debt would be wiped out by 2009, thanks to the balanced budget.
But that “gift” turned out to be “one brief shining moment,” as the song from Camelot has it. The balanced budget didn’t last even half of one generation. Under President George W. Bush, giant tax cuts and spending increases vaporized the surplus. That didn’t set off alarms in the White House; Vice President Dick Cheney was quoted as saying that “Reagan proved deficits don’t matter.”
The September 11, 2001 terrorist attacks on the U.S. and the wars in Iraq and Afghanistan combined with higher entitlement spending to worsen the budget picture. By 2003, the deficit reached $377 billion. It hasn’t come even close to balance since.
Trump’s trouble
Trump’s tax cuts widened the gap in 2017, although many of them were set to expire in 2026. Extending those cuts will add trillions to the federal debt, unless Congress can find ways to pay for them with comparably-sized spending cuts, a politically insurmountable task at the moment.
Getting Republicans to stick together in backing the extension of the 2017 cuts is challenging. Some conservatives are demanding drastic budget reductions while more moderate members are focused on deficit-expanding priorities such as increasing the deductibility of state and local taxes.
And here’s where the scary bond market comes in…again. America’s budget deficits have been financed by an inflow of overseas investments in U.S. Treasury bills and bonds. In 1970, 5% of the debt was owned by foreign holders, including governments. By the end of 2023, that proportion had grown to 29%.
Even before Trump took office for the second time, there were fears that the U.S. debt was so out of control that investors around the world would lose patience and demand much higher interest rates to buy Treasury debt. If the tax cuts throw the budget picture farther out of whack, the government may be faced with punitively high interest rates to finance the debt. Interest is costing it nearly a trillion dollars this year alone.
Worse, the unpredictable Trump administration’s tariff scheme is upending investors’ expectations around the world and threatening major changes in the flow of trade. Bond investors have been especially wary of the policy disorder, fearing that higher interest rates could reduce the value of their bonds.
When Trump put his controversial reciprocal tariffs on hold for 90 days in early April, the president said the markets were getting “yippy.”
“I was watching the bond market,” he said. “The bond market is very tricky.” He should know.
The New York Times pointed out that the president has hundreds of millions of dollars personally invested in bonds.
GOP heresy
Ever since Reagan, Republicans have clung to a commitment to cutting taxes. But recently a few of the party’s populists have dared to back higher rates on people who earn millions. Among them is Steve Bannon, who said at a Semafor event in Washington last week that “the current system we have is not sustainable” and that “tax increases on the wealthy” are needed, along with spending cuts.
Newt Gingrich called the idea of tax hikes for high-income earners “madness” and recalled the “Read my lips” pledge of George H.W. Bush.
Trump, a billionaire who reportedly pays little in taxes, seems equivocal about a millionaires’ tax hike. He told Time magazine, “I actually love the concept, but I don’t want it to be used against me politically.”
In 1993, Bill Clinton could have taken the same stance and opted against raising taxes on the wealthy. He didn’t.
