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Short Memories

08/01/2012 02:55 pm ET | Updated Oct 01, 2012

Looking back to the year 2000, it's hard to believe that many analyses then, including those of the Office of Management and Budget, projected that by 2010 the federal debt would be completely paid off. But a funny thing happened on the way from the Clinton administration's budgets with surpluses to the fix we find ourselves in today. Or maybe not so funny.

Clinton's successor, George W. Bush, quickly reversed the fiscal policies of the previous administration. The results: tax cuts, especially for those with the highest incomes among us, two wars financed by national credit card, and the deepest recession in two generations. So today we find ourselves, not paying down the debt, but rather substantially adding to it.

Looking back further, few remember the balanced budget bill signing party in 1993. There was barely room in the White House for all those claiming credit for ending federal deficits, with collateral huzzahs for just about everything they'd ever done in office. Everything, that is, except the one thing that actually contributed the most to eliminating the gap between revenues and expenditures. I don't mean budget reductions; they were toasted all over town. But even then, there were no parades for the 1993 tax increase.

In addition to spending restraints, the vigorous economic recovery from the recession of 1991-92 also received much public applause, which is fair. There can be no doubt that strong economic growth helped mightily in the painful process of reaching a bipartisan budget agreement. The economy's growth meant sharply higher tax revenues, as well as declines in spending for things like unemployment.

Still, the biggest contributor to the balanced budget over the period of 1993-1998, accounting for almost half of the overall projected reduction in the deficit, was the increase in taxes, especially on upper income Americans. Bill Clinton signed that increase into law during his first year in office, after Democrats in Congress had passed the legislation without a single Republican vote. As a result, the tax rate on high-income taxpayers increased from 31 to 36 percent; and for the wealthiest among us, those with incomes of more than $250,000, it was hiked to 39.6 percent. The package also included a 4.3 cents a gallon increase in the gasoline tax. Administration economists correctly predicted that 80 percent of the new taxes would be paid by those with incomes of over $200,000 a year.

Conservatives, on the other hand, predicted that the sky would fall. But, in fact, credit did not dry up, entrepreneurial spirit bloomed, and investors flocked to Wall Street. The rich, of course, did just fine. Their share of the country's income and wealth continued to grow faster than that of average Americans -- albeit not quite as rapidly as would have been the case without the tax increase. Inequality continued to be near an all-time high.

The prophets of doom were sure that the tax package would send the economy into the tank and, for all that, would not even raise much money. They were wrong on both counts. Revenues from the 1993 tax increase exceeded even its supporters' expectations.

The fact is that the 1993 tax increase was very good public policy and also a rare example of political courage and the centerpiece for a decade of fabulous prosperity.

What changed the course of economic policy?

Subsequent cuts in capital gains and estate taxes did not in any way reduce the deficit. But they were a highly targeted way to say "I'm sorry" for the increase in rich folks' taxes. And that gesture shouldn't surprise anyone, since it's the rich who pay for American political campaigns (only .02 percent of us give more than $200 a year in political contributions.).

So why isn't this bit of history a bigger part of the current debate about letting the Bush tax cuts for those earning more than $250,000? Well, perhaps any tax increase is destined to become a political orphan in these anti-government times. The Democrats may be reluctant to acknowledge responsibility for the increases in 1993 and Republicans don't want to remind the public about how wrong they were during the Bush years. Moreover, a tax increase would be a bad idea now, with the economy still sluggish after the "Great Recession." But the time will come when it is the right thing to do. Then we could do worse than remember the example of 1993. A lot has happened since the federal budget surpluses of the late 1990s. But it's still a good reminder that in many important ways we still control our economic destiny - if only we have the courage to do so.