Let's Review: What's the Point of Raising Taxes?

Tonight is Bill Clinton's turn at the center-stage podium at the DNC. Nobody knows what he's going to say. Not even, reportedly, the Obama team. But the editors of National Review have a reasonable prediction: Democrats will "seek to associate President Obama with the prosperity of the Clinton years" and make the case for higher taxes.

Obama would like to raise the top marginal rate on earned income from 35% to about 40%, which was the rate under Clinton. The NR editors object that this will achieve its purpose:

The argument for Clintonomics was that raising taxes would lower the deficit, a lower deficit would bring down interest rates, and lower interest rates would bring economic growth. It didn't actually work that way in the '90s.

Wait, what? It worked out exactly that way in the '90s. The interest rate on 10-year bonds fell from 8% to nearly 4% in 1998 (under Republican House leadership, a strong economy, and a vigilant Federal Reserve), and the deficit turned into a surplus.

It's true enough that Clinton-era tax rates won't create Clinton-era growth, but who would even predict such a thing? The purpose of raising taxes is pretty simple. It's to fund the government. And, basically, it works. Even if the Laffer Curve exists, the record is clear that recent tax increases under George H. W. Bush and Bill Clinton increased revenue as a share of GDP, and tax cuts under George W. Bush deprived the Treasury of dollars they would have collected under an early tax regime.

"Clinton knows that higher taxes will not bring back the economy of the 1990s," the NR editors write. But nobody is claiming that a top marginal tax rate of 39.6% is The Secret Code to unlock the dormant 1996-era productivity growth rates. There is a much simpler claim here. Taxes raise money. Raising taxes raises more money. Reagan got it (he raised taxes repeatedly after 1981). Bush I got it. Clinton got it. It's only since Bush II that the obvious claim became controversial: More money for the same government means lower deficits.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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