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61 IRET Policy Bulletin 1 (1993)

handle is hein.taxfoundation/iretpbul0020 and id is 1 raw text is: July 15, 1993 [No. 61 BUDGET PACKAGE THREATENS SAVING, GROWTH Introduction As this study goes to press, the final version of H.R. 2264, the Omnibus Budget Reconciliation Act of 1993 (OBRA93) is being negotiated in a House-Senate conference. OBRA93 would contain the bulk of President Clinton's economic proposals, as modified by the Congress. One of the chief objectives of the reconciliation bill is deficit reduction. The chief reason given for seeking deficit reduction is that it would lower government borrowing and, supposedly, raise national saving by decreasing the government's absorption of private saving. Supposedly, the higher national saving would reduce interest rates, permit more private sector investment and faster economic growth, and enhance the global competitiveness of U.S. businesses. This line of reasoning is fatally flawed. It rests on the assumption that the tax increases that make up the bulk of the reconciliation package would have no adverse effect on private saving and on investment incentives. Yet the tax increases would reduce private saving dollar for dollar, or more. There is no reason to believe that national saving would increase, no reason to suppose that interest rates would be lower, and every reason to believe that saving, investment, and GNP would be less than they would be if this package does not become law. OBRA93 would depress saving by raising marginal tax rates on individuals and businesses and by curtailing retirement saving plans. Higher tax rates would reduce individuals' and businesses' after-tax incomes, reducing the private sector's ability to save. More importantly, higher tax rates would lower after-tax returns to savers and thereby reduce the incentive to save out of any given amount of after-tax income. As a result, saving and investment would be less than they would be without the tax increases, slowing the growth of GNP. Lower growth of GNP would further reduce the growth of after-tax income and saving compared to levels achievable in the absence of the tax increases. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 . Washington, D.C. 20006 Taxation (202) 463-1400 e Fax (202) 463-6199 . Internet www.iret.org

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