2. WHAT WE HAVE ACCOMPLISHED: THE CLINTON ECONOMIC PLAN The Clinton Administration rejected the legacy of the past and moved toward a new vision of the future. Its economic agenda called for shrinking the budget deficit, thus reducing Federal borrowing to free resources for private investment; increasing public investment in skills, technology and infrastructure to enhance productivity, spur long-term economic growth, and prepare current and future workers for higher-wage jobs and greater opportunities; reversing the trend toward rising income inequality; and expanding world trade and opening foreign markets for U.S. exports. Genuine Deficit Reduction for Private Investment.--On August 10, 1993, 202 days after taking office, the President signed into law the Omnibus Budget Reconciliation Act of 1993 (OBRA-93). The Act reduces budget deficits in 1994 through 1998 by a total of $504.8 billion through a balance of $254.7 billion from net cuts in Federal spending and $250.1 billion from net revenue increases. The spending cuts were aimed at low-priority, outdated programs in virtually every part of the budget, achieving savings to finance both deficit reduction and cost-effective public investment. Savings were achieved through specific cuts in discretionary programs; reform of entitlements (including Medicare and Medicaid); and extension and improvement of the process disciplines in the 1990 Budget Enforcement Act (BEA), including discretionary spending caps, and "pay-as-you-go" rules for taxes and entitlement policies. Entitlements.--OBRA-93 contained $71 billion in five-year net entitlement savings, which included: o $49.1 billion from Medicare, largely from reducing payments to hospitals, physicians, and other providers. o $7.2 billion from Medicaid, mainly from repealing the mandatory provision of non-medical personal care services and imposing needed controls on supplemental payments to hospitals that serve large numbers of poor or uninsured patients. o $11.5 billion from Federal retirement programs, primarily from delaying retirees' cost-of-living adjustments, eliminating the lump-sum payment option, and restraining retirement and health benefits. o $1.7 billion from agriculture programs. o $3.5 billion from veterans programs. o $3.6 billion from replacing the costly guaranteed student loan program with a direct loan program. Discretionary.--OBRA-93 extended the BEA through 1998, which otherwise would have expired after 1995. With its discretionary caps, OBRA-93 imposes a real, enforceable five-year hard freeze on discretionary outlays that produces $107.7 billion in savings, and reduces spending in inflation-adjusted terms over the five years by about 12 percent. These mandated savings for 1994 were achieved through the appropriations process. Discretionary outlays were estimated in the OMB Final Sequestration Report at $542.6 billion--1.4 percent below the 1993 level of $550.1 billion. Hundreds of budget accounts were cut without any allowance for inflation. The 1995 budget is limited to $541.7 billion--another 0.4 percent year-over-year cut, without reference to inflation. Entitlement Targets and Deficit Reduction Fund.--The President implemented other budget enforcement measures to restrain Federal spending. Last August, he signed an Executive Order (No. 12857) setting a separate entitlement budget, with numerical targets for 1994 through 1997. The President must specifically inform the Congress if spending exceeds or is projected to exceed these targets, and propose whether and how to address the overage. This Executive Order took the place of an identical legislative proposal, which passed the House but was procedurally blocked by a minority in the Senate. A second Executive Order (No. 12858) established a Deficit Reduction Fund, which will help ensure that the deficit reduction intended under OBRA-93 becomes a reality. This Fund contains the savings achieved year by year under OBRA-93, and may be used only to retire maturing public debt instruments owned by foreign governments. Tax Fairness.--On the revenue side, the President's plan reversed past policy by requiring those most able to pay to make the greatest contribution to deficit reduction. OBRA-93's tax increases fall almost exclusively on higher-income taxpayers. The major provisions include (revenue figures over five years): o $124 billion from a new 36-percent marginal tax bracket on taxable income exceeding $140,000 for joint returns and $115,000 for single taxpayers (generally equivalent to almost $200,000 of gross income for joint returns, and $150,000 for single persons); a 10-percent surtax on taxable income over $250,000; an increase in the alternative minimum tax; and permanent extension of the limitation on itemized deductions and the phaseout of personal exemptions. o $29 billion from repeal of the $135,000 limit on income subject to the Medicare wage tax. o $16 billion from reducing the deductible portion of business meals and entertainment from 80 percent to 50 percent. o $14 billion from increasing the top marginal corporate income tax rate from 34 percent to 35 percent. o $32 billion from extending the 1990 tax increase of 2.5 cents per gallon on transportation fuels and adding a permanent increase of 4.3 cents per gallon on motor fuels. o $18 billion from increasing from 50 percent to 85 percent the taxable portion of Social Security benefits for the 13 percent of beneficiaries with the highest total incomes. Tax Incentives.--In addition to these and some smaller tax increases, OBRA-93 also contained a number of tax incentives. o Expansion of the earned income tax credit (EITC) is one of the most important anti-poverty actions in recent history; when fully phased in, the increased EITC plus food stamps will lift from poverty families with children where at least one parent works full time. The EITC expansion is also a major step toward welfare reform--by making work pay. o Small businesses received important tax incentives. The expensing allowance for investment, especially important for small business, was substantially increased. A targeted capital gains provision for new small businesses was enacted. The deduction for health insurance premiums of the self-employed was extended. o Extension of the credit for research and experimentation encourages technological advancement. Alternative minimum tax relief was provided for business investment depreciation. o Empowerment Zones were enacted for the first time, to help in the renewal of targeted urban and rural areas. The low-income housing credit, mortgage revenue bonds, and small-issue industrial development bonds were made permanent. Deficits Decline.--By 1998, the last year of the President's program, the budget deficit was expected to be $145.8 billion below what it otherwise would have been--a cut of about 1.8 percent of projected 1998 GDP. Public Investment: Human, Physical, Technological.--The President's economic plan contained more than just deficit reduction. It also called for increased public investment in people, jobs and infrastructure to promote faster growth of productivity and living standards--financed by budget savings above and beyond the mandated deficit reduction. o A world of rapidly changing technology, where workers change jobs several times in a lifetime, calls for skills and adaptability. The President proposed a program of lifelong learning through better schools and job training to meet these challenges. This included expansion of Head Start (including child care feeding and Medicaid), youth apprenticeship for non-college-bound secondary school students and national service to help others to afford college, a dislocated worker program, and other initiatives. o Rebuilding America requires public investment in transportation, the environment, community development and defense conversion. Initiatives were proposed to: --Expand the Federal-aid highway program to the level contained in the Intermodal Surface Transportation Efficiency Act (ISTEA); accelerate "smart cars/smart highways" programs to improve traffic control and provide congestion information; increase funding for mass transit capital improvements; and modernize air traffic control. --Develop advanced systems to recycle materials, treat toxic waste, and clean up air and water pollution. --Explore new science and technology to create high-wage jobs and push America toward the cutting edge of manufacturing; apply defense technology to business; and promote cooperative efforts by business, Government and universities to advance research. Public Investment.--$11.5 billion--69 percent of the budget authority requested by the President--was reallocated from defense and low-priority non-defense programs to public investment in 1994 legislative action. Infrastructure: The 1994 budget included a $1.0 billion increase for mass transportation grants, other transportation programs, and Corps of Engineers water projects. Congress provided $773 million, or 77 percent of the requested increase. In addition, the Administration requested an increase of $2.6 billion in the obligation level for construction and repair of interstate highways and bridges under ISTEA. Congress provided $1.8 billion, or 69 percent of that amount. This is a 15 percent increase over 1993. Health and Nutrition: The Administration requested a $2.4 billion increase for public health, nutrition, and food safety programs, with a particular focus on AIDS, women's health, veterans' health care, and the Women, Infants and Children feeding program (WIC). Congress provided $1.8 billion, or 75 percent of the requested increase. This includes $232 million of the $310 million requested increase for the Ryan White Act and $273 million of the $350 million requested investment increase for the WIC program. The Ryan White funding represents an increase of 66 percent over the 1993 level. The WIC funding is a 23 percent increase from 1993. Head Start: The 1994 budget included a $1.3 billion investment increase for Head Start. Congress approved 36 percent of the proposed increase, nearly a 20 percent increase over the 1993 enacted level. Education and National Service: The 1994 budget included a $1.4 billion increase for education programs. Congress appropriated $659 million, or 47 percent of the requested increase. This includes funds for three new programs: (a) $105 million for Goals 2000 education reforms; (b) $370 million for national service; and (c) $50 million for the Education Department share of the school-to-work program. Employment and Training: The Administration requested a $2.9 billion increase for employment and training programs. Congress appropriated $962 million, or 34 percent of the requested increase. This included a $587 million increase for dislocated worker assistance, which was a 116 percent increase--more than doubling--for that program from 1993. Also, the Labor Department received $50 million for its share of the school-to-work program. Science, Technology and Energy: The 1994 budget included $1.3 billion in new funding for NOAA weather technology, National Institute of Standards and Technology (NIST) programs, information highways, energy research, NASA research and development, the National Science Foundation, the Federal Coordinating Council on Science, Engineering and Technology (FCCSET), and related programs. Congress provided $1.1 billion of new funding, or 82 percent of the requested increase. This included $26 million for the new information highways program. Also, the increase for NIST--to fund such activities as high-performance computing--represented a 36 percent increase over the 1993 level. Crime: The President requested a $390 million increase for the Justice Department for salaries and expenses for the FBI, INS, Federal prisons, and the Community Relations Service; prisoner support; and Federal/State partnerships. Congress appropriated $164 million, or 42 percent of the requested increase. This includes $25 million out of $100 million requested to hire police through Federal/State partnerships. Housing and Community Development: The 1994 budget included a $1.8 billion increase for a number of low-income and other housing programs, Community Development Block Grants, and Community Development Financial Institutions. Congress exceeded the President's request, appropriating $2.1 billion in new funds for these programs. Environmental Protection and Enhancement: The 1994 budget included $2.0 billion in investment funding for the Forest Service, the Interior Department, the Energy Department and the Environmental Protection Agency for infrastructure projects to implement the Clean Water and Safe Drinking Water Acts; infrastructure improvements in national forests and parks; and energy conservation programs. Congress approved $1.9 billion, or 97 percent of the request. Rural Development: The President requested $560 million in new funding for rural development, housing and wastewater treatment (supporting $1.6 billion in new loans and loan guarantees). Congress appropriated $374 million (supporting $1.2 billion in loans and loan guarantees), or 67 percent of the requested increase. Fairness in OBRA-93.--OBRA-93 achieved the Administration's objective of placing the heaviest tax burden on those most able to carry it, while lightening the load on those least able to pay. As a result, the tax system is more progressive than at any time since 1977, according to the Congressional Budget Office (CBO). OBRA-93 provisions affecting taxes are outlined above. The distributional impact of these and other provisions is shown in Table 2-1. Whether measured by the change in average taxes, the share of total new taxes raised, or the change in effective tax rates, the message is the same: The tax system has been made fairer. o At the top of the income distribution, families with $200,000 or more in annual income (1.3 percent of all families) will pay on average about $23,500 in additional taxes per family, according to CBO estimates. In total, they will pay 80 percent of the taxes raised by OBRA-93 ($33 billion out of $41 billion). The effective tax rate for the average family in this upper income bracket is likely to increase from about 28 percent to almost 33 percent. o Families with $100,000 to $200,000 in income (5.2 percent of all families) will pay on average about $650 more in taxes, raising their effective tax rates by one-half of one percentage point. In aggregate, they will pay about $3.6 billion more in taxes. o Thus, families with incomes over $100,000 will shoulder about 90 percent of the taxes raised by OBRA-93. Table 2-1. DISTRIBUTIONAL EFFECTS OF OBRA-93 ---------------------------------------------------------------------- Effective Average Tax Rate Family Income (dollars) Number of Change Total ---------------- Families in Taxes Change Before After (millions)(dollars)(billions) OBRA-93 OBRA-93 ---------------------------------------------------------------------- $1-$10,000............... 15.1 -68 -1.0 7.5 6.4 $10,000-$20,000.......... 18.8 -86 -1.6 11.5 10.9 $20,000-$30,000.......... 16.9 -41 -0.7 16.9 16.8 $30,000-$40,000.......... 13.6 50 0.7 19.8 19.9 $40,000-$50,000.......... 10.7 105 1.1 21.6 21.8 $50,000-$75,000.......... 16.8 192 3.2 23.4 23.7 $75,000-$100,000......... 7.3 312 2.3 25.2 25.5 $100,000-$200,000........ 5.6 649 3.6 26.1 26.6 $200,000 or more......... 1.4 23,521 32.9 27.9 32.7 All incomes.............. 108.1 382 41.3 22.8 23.7 ---------------------------------------------------------------------- Source: Congressional Budget Office. Family income is before-tax money income including realized capital gains and cash transfers. It also includes an allocation of the employer share of Social Security and federal unemployment insurance payroll taxes and corporate income tax. Thus, family income includes all federal income, social insurance and corporate income taxes. Effective tax rates include these taxes as well as federal excise taxes. Changes in corporate income taxes due to OBRA-93 are distributed according to families income from capital. The all-incomes line includes families with negative incomes. ---------------------------------------------------------------------- o Families with $30,000 to $100,000 in annual income will pay only slightly more in taxes, ranging on average from $50 for families at the low end of this range, to $312 for those nearer the top. The effective tax rates for families in this range will be increased by only a few tenths of a percentage point. o Families with incomes below $30,000 will have their tax payments lowered on average $41 to $86 per year for a total decrease of $3.3 billion--due largely to the historic increase in the earned income tax credit. o The effective tax rates for families with incomes below $20,000 will be lowered by about one-half to one percentage point. In other words, those at the low end of the income distribution will be better off because of OBRA-93. (See Chart 2-1.) Low- and middle-income families are still protected by inflation indexing of the income tax rate brackets. Insert chart: CHART2_1 Opening Foreign Markets.--The President's plan also called for free and fair trade, to maintain our place in the increasingly integrated international economy--to be achieved through ratification of the North American Free Trade Agreement (NAFTA), after completion of key side agreements, and negotiation of the Uruguay Round of trade liberalizations under the General Agreement on Trade and Tariffs (GATT). When the Administration took office, the prospects for market opening were cloudy. NAFTA had been signed by the United States, Canada and Mexico, but opposition in the Congress was strong. The Uruguay Round negotiations, which had started in 1986, were foundering; the United States and some of its major trading partners were at odds over seemingly intractable issues. The Federal Government seemed poorly prepared; opening markets simply had no priority. This Administration reversed that dismal course, making completion of the agreements a high priority and undertaking a review of trade promotion activities. The most urgent issue was NAFTA. The President directed that the agreement be improved through negotiation of side agreements to assure that no NAFTA partner used lax enforcement of its domestic environmental or labor laws to attract trade or investment. The side agreements were concluded on August 13, 1993, and legislation for Congressional "fast track" action was transmitted on November 1. The assurances in the side agreements and an extraordinary Administration effort to explain the long-term benefits to the the country brought passage by the Congress on November 20, 1993. NAFTA creates a free trade area of more than 360 million consumers and over $6 trillion annual output, linking the United States to our first and third largest trading partners (Canada and Mexico). NAFTA will stimulate growth, create job opportunities, enhance the ability of North American producers to compete, and raise the standards of living of all three countries. Approximately 60 percent of U.S. exports to Mexico will be eligible for duty-free treatment within five years. NAFTA also includes agreements providing fair treatment for services, investment, intellectual property rights, and agriculture; strengthening trade rules; and creating a regional development bank. The President also directed the U.S. Trade Representative to assure the successful completion of the Uruguay Round negotiations, achieving the fullest possible market opening. To facilitate this effort, the Congress passed an extension of its fast track authority that was signed by the President on July 2, 1993. In December, the United States reached agreement with the members of the General Agreement on Trade and Tariffs (GATT) to reduce tariff barriers and remove other nontariff barriers to trade. The recent agreement also extends GATT coverage to areas of trade and investment that up to now have not been subject to GATT discipline, including agriculture, textiles, services, and intellectual property rights. The Uruguay Round will increase U.S. incomes and jobs because open markets promote specialization that raises productivity and creates new employment opportunities. Studies suggest that these gains could add approximately one percent to the level of U.S. GDP after the tariff cuts are fully phased in. Additional benefits from trade liberalization in services, enhanced protection of intellectual property rights, and other improvements could add another 0.5 percent to GDP. The combined gain would add $100 billion to $150 billion to U.S. GDP ten years after implementation of the agreement. In 1993, the President also hosted the first-ever meeting of the Asia-Pacific Economic Cooperation (APEC), which is working toward greater trade liberalization in that important region.