Deficit Reduction by Tax Increase on the Rich: A Historical Analysis of Omnibus Budget Reconciliation Act of 1993

Seito Hayasaki, Keio University

In 1993, President Bill Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 (OBRA93), one of the largest fiscal deficit reduction packages in US fiscal history. OBRA93 increased the top individual income tax rate from 31% to 39.6%, as well as setting an upper limit on discretionary spending and a “pay as you go" rule on mandatory spending. Although the spending constraints were crucial for the fiscal deficit reduction in the 1990s, the individual income tax hike on the rich was much more important. In the US, the top 10 per cent of income earners paid around 60 per cent of the total individual income tax at that time. Furthermore, income tax revenue is more elastic to the business cycle than other types of tax. This paper aims to explain why the tax hike was possible through analyzing the legislative process and lobbying activities based upon archival sources at the Clinton Presidential Library. Previous literature attributes this cause to the fact that the idea of progressivity or vertical equity was preferred by Democrats. However, it leaves unquestioned whether the rich accepted the tax hike or not. This paper documents that although business interest groups such as the U.S. Chamber of Commerce and National Association of Manufacturers were opposed to the income tax increase, there were a significant number of companies and CEOs supporting it for the sake of fiscal deficit reduction. This support from companies and CEOs helped the administration and the Democrat majority leaders to pass the law.

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 Presented in Session 47. Facts and Fictions: Expert Ideas in the Politics of Public Finance