The economic boom came as a direct result of the Deficit Reduction Act of 1993. He raised the tax rate on the top to a top marginal rate of 39% and brought revenue back into line with spending. Here's why that worked.
Budget deficits put inflationary pressure on the economy -- or at least many believe that they do. The result was high interest rates that kept economic growth down to 2% -- the number the Fed believed was low enough to hold off inflation.
It turned out that with the budget steadily moving back into balance starting in 1994, the economy could sustain much higher GDP growth without inflation. In fact, interest rates continued to drop, and this had a further stimulating effect.
Everybody talks about taxes as a drain on the economy -- and they certainly can be. But at least with taxes, you get something for your money in the form of services and infrastructure. Nobody considers "private taxes" also known as interest payments. Interest is factored into the cost of everything you buy.
The lowered interest rates in an expanding economy had the same stimulative effect that tax cuts are supposed to have. They lowered everybody's balance of payments, and put more disposable income in people's pockets. Here's the thing, tax cuts mostly benefit people with assets. Interest rate cuts benefit people with debt -- the people on the bottom or in the middle.
Thus you have a boost in consumer spending, mortgage refinancing where people cash out their home equity, and that winds up going into the stock market and new small businesses. Thus did the public tax increases in 1993 lead to "private tax" cuts -- cuts in interest rates, that led to growth without inflation.
Had those tax rates remained in place, we were looking at a real possibility of paying off the national debt in ten to fifteen years, freeing up 300 billion dollars in interest payments. Down the road, we could have been looking at increased social spending AND tax cuts.
There you have it. Tax increases on the top led to balanced budgets, removed inflationary pressure, allowed higher levels of non-inflationary growth, lowered interest rates across the board, stimulating both consumer spending and investment. And it was all Clinton. He proposed the Deficit Reduction Act, and busted his ass to get it passed by one vote in the House, and Gore's tie breaker in the Senate.
Today, people in polls say that both public services and balanced budgets are more important than "tax cuts" -- and that includes people on the top. He restored the good name of "progressive taxation."
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