Introduction
“It is a landmark achievement not just for those in this room who have played a role in it but, indeed, for all the American people. And it will be a gift-giving achievement for generations to come,” said President Bill Clinton on September 30, 1998, celebrating one of the most important achievements in his presidency, a budget surplus.Footnote 1 For almost 30 years since 1969, the federal government budget had been running deficits. When Clinton took office as President in 1993, deficits were still ballooning and were considered to pose an imminent threat to the American economy. Within five years, however, the federal fiscal balance drastically shifted from deficit to surplus. Clinton attributed this success in deficit reduction to the 1993 budget bill—officially known as the Omnibus Budget Reconciliation Act of 1993 (OBRA93)—and to the Democratic members of Congress who voted to pass it.
Nevertheless, evaluating the effects of the OBRA93 is a controversial topic. Instead of being praised, Clinton and his administration have often become a target of criticism for their strong inclination toward deficit reduction and their willingness to restrain the growth of social spending.Footnote 2 Wolfgang Streeck made this point explicitly by stating, “Under the Clinton administration, attempts were made to balance the budget mainly through social spending cuts.”Footnote 3 Moreover, the importance of deficit reduction in itself has been seriously questioned in current macroeconomic debates.Footnote 4 Due to the Global Financial Crisis and slow economic recovery afterward, the amount of public debt in relation to GDP among high-income nations has increased spectacularly and even reached a historical record. Nonetheless, government insolvency and hyperinflation are unlikely to occur at present, despite repeated warnings from fiscal hawks.Footnote 5 In this context, a growing number of scholars advocate larger spending instead of worrying about deficits.Footnote 6
Much more vigorous and sophisticated discussion is needed to give a precise policy prescription to the current macroeconomic debates, and the purpose of this paper is not to discuss these issues. Instead, this paper seeks to bring our attention to the fact that Bill Clinton’s budget relied far more on tax increases than expected instead of being heavily directed toward spending cuts. According to an estimate by Jerry Tempalski, OBRA93 led to an increase in annual federal receipts by 3.5% (four-year average) after enactment.Footnote 7 The magnitude of the tax increase, was thus, the second largest since 1968, next to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), at 5.7%. Given that the role of TEFRA was to offset revenue loss caused by prior legislation—the Economic Recovery Tax Act of 1981 (ERTA)—instead of bringing a net revenue increase, OBRA93 can be even considered as the largest tax hike.Footnote 8
The Omnibus Budget Reconciliation Act of 1993’s approach emphasizing tax increases led to intense opposition from the Republican Party and conservative members of the Democratic Party. The budget bill was unable to garner a single yea vote from the Republican Party throughout the legislative process. In addition, more than 40 Democrats voted against the bill, which resulted in its passing with only a razor-thin majority of 218-216 in the House and 51–50 in the Senate. Had a few conservative Democrats not switched their votes from nay to yea, an alternative budget package including more spending cuts on social and welfare programs would have been enacted. Therefore, Clinton and Democratic leaders, albeit barely, succeeded in protecting some important programs from conservative cutbacks by maintaining yea votes from some conservative or moderate Democrats. From this standpoint, how Clinton and Democratic leaders could manage to garner the yea votes is a matter of interest. However, existing studies do not uncover sufficient details pertaining to the negotiation process, if any.Footnote 9
To fill this gap in existing literature, this paper uses archival sources from the Clinton Presidential LibraryFootnote 10 and attempts to substantiate an important factor that is largely ignored in existing studies yet presumably affected the passage of the bill: Democrats’ mobilization of business to lobby key legislators to vote for the bill.Footnote 11 To secure enough votes, the Clinton administration and Democratic committee chairs, particularly Dan Rostenkowski (House Ways and Means Committee chair), sought support from the business community to lobby key legislators. In fact, some business leaders, including Fortune 500 executives, responded to this request and lobbied congressional members in favor of the bill.
This support from corporate leaders, however, leads to another question: What type of tax increase was supported and accepted? As the most important measure to increase tax revenues, Bill Clinton proposed a progressive tax increase instead of a regressive one in his budget proposal in 1993. Clinton’s budget proposal included two new individual income tax brackets of 36% and 39.6% on earned income, which increased the top individual income tax rate by 8.6% from 31%.Footnote 12 This income tax increase was included in the final bill and was enacted as the biggest revenue increase item in OBRA93. Estimates in 1993 expected that this tax increase on high-income earners would account for more than 40% of the entire revenue increase due to OBRA93 over five years. Moreover, an estimate published by the Congressional Budget Office (CBO) in 2008 indicates that 45% of the income tax revenue increase in the late 1990s was due to an increase in the effective tax rate.Footnote 13 Therefore, the top tax rate increase played an important role in building the revenue capacity of the federal government in the 1990s. How could corporate leaders, who were high-income earners themselves, support such a tax increase targeting the rich?Footnote 14
This question requires us to seriously reconsider the orthodox view that businesses and high-income earners are monolithic and exercise strong influence to lower their tax burden.Footnote 15 This paper presents the support from corporate leaders as an important factor that contributed to the passage of the OBRA93 and attempts to examine common assumptions about business and high-income earners.Footnote 16 Historical records about OBRA93 allow us to examine diverse opinions in the business community and explore the possibility of Democrats’ business mobilization to counter conservative tax cut agendas.
Tax and Deficit Politics since Reagan
Recent studies have highlighted the growing political influence of businesses and high-income earners as a factor to explain rising economic inequality and ineffective government redistributive policies in the United States.Footnote 17 Both income and wealth inequality started to increase sharply in the 1980s, and Reagan-era tax cuts were considered one of the primary factors driving the trend.Footnote 18 President Reagan, while lowering individual income tax rates across the board, massively cut the top income tax rate by ERTA from 70% to 50%, and further to 28% through the Tax Reform Act of 1986 (TRA86).Footnote 19 Businesses and high-income earners reportedly played a crucial role in implementing the tax cuts and subsequently keeping taxes low.Footnote 20
However, the income tax rate cuts were not supported by business interest groups such as the National Association of Manufacturers (NAM) and the Business Roundtable because they were worried about the potential resultant deficits.Footnote 21 Instead, business groups were enthusiastic about tax cuts for business, particularly accelerated depreciation. This business request was included as a part of the ERTA but was soon reversed significantly in the following tax reforms during the Reagan presidency. In contrast, the individual tax rate cut was maintained partly because of Reagan’s strong preference for low marginal income tax rates.Footnote 22
Furthermore, business groups, albeit reluctantly, accepted three tax increase bills during the Reagan presidency—namely, the TEFRA, the Deficit Reduction Act of 1984 (DEFRA), and the TRA86.Footnote 23 These tax reforms directed at addressing the issue of tax base erosion. Eliminating loopholes and broadening the income tax base had been a matter of concern among tax experts.Footnote 24 Accordingly, the three tax reform bills included significant tax increase measures; most importantly, they raised taxes on business. The tax increases, particularly the repeal of accelerated depreciation, provoked significant discontent among business interest groups. For instance, Richard Lesher, President of the US Chamber of Commerce (USCC), expressed his opposition to TEFRA “by refusing a direct request by Vice President Bush and White House counselor Edwin Meese to use the Chamber’s television studio for pro-TEFRA publicity.”Footnote 25 Nonetheless, business groups as a whole valued the importance of cooperating with a conservative president.Footnote 26 Due in part to their own concerns about the growing deficit, business groups eventually accepted the tax hikes.
After George H. W. Bush took office as President, business leaders’ concerns over deficits became stronger, and some business leaders even proposed a gasoline tax increase to bring down the deficit in 1989.Footnote 27 Moreover, when Bush betrayed his “no new taxes” campaign pledge and compromised with congressional Democratic leaders to form a deficit-reduction package that included tax increases in 1990, business groups—namely, NAM, Business Roundtable, American Business Conference, and National Small Business United—supported Bush on the grounds that he had successfully compiled a credible bipartisan deficit-reduction package.Footnote 28
However, when Clinton proposed his deficit-reduction package, which relied more heavily on tax hikes than previous deficit-reduction packages did, he did not receive favorable responses from business groups. The latter part of this paper discusses how each major business group criticized the plan and argued that spending cuts should be prioritized to reduce the deficit. Their understanding was that despite repeated tax hikes, deficits did not stop growing; therefore, excessive spending was the cause of the growing deficit. Unlike under Reagan and Bush, the business groups neither compromised with nor supported Clinton and instead lobbied congressional members to oppose Clinton’s proposal. This opposition from business groups, combined with Republican and conservative Democrat attacks on the tax hikes, made the Clinton administration realize that the passage of the bill was highly uncertain. Moreover, by then, business interest groups had largely shifted their focus from deficit reduction toward conservative tax-cutting agendas.Footnote 29
How did the Clinton administration and congressional Democratic leaders then pass the law in such politically adverse circumstances? Reportage and memoirs appear to provide an important finding in this respect that has received insufficient scholarly attention: some high-income earners and businesses did support the tax hikes.Footnote 30 Journalist Bob Woodward documents that Robert Rubin (director of National Economic Council) told his colleagues within the Clinton administration that many of the rich were not opposed to the income tax hike.Footnote 31 Furthermore, business magnate Warren Buffet is said to have advised Senator Robert Kerrey (D-NE), who wanted large spending cuts, to vote for the final bill at the last stage of the legislative process.Footnote 32
However, these accounts are inadequate in that they do not mention opposition from business interest groups such as USCC; except for Buffet, who supported the tax hikes, the kind of actions those supporters took remained unclear. However, archival materials from the Clinton Presidential Library allow us to uncover business behaviors behind the legislative fight in detail. As Woodward and Rubin suggested, many business leaders accepted the tax increase. Notably, they did so even though major business interest groups opposed the tax increase. The fragmentation among business interests has been pointed out in some studies.Footnote 33 Nevertheless, only a few studies have paid adequate attention to the role of those who supported progressive tax increases in business. The following sections situate the role of their support in the entire budget process of 1993.
The Success of the State of the Union Address
On February 17, 1993, President Clinton delivered a speech on his economic plan before a joint session of Congress.Footnote 34 Although he talked about wide-ranging issues, such as NAFTA and health care reform, at the heart of his speech was deficit reduction. Although his deficit-reduction plan included programs that seemed to contradict the same, such as new investment initiatives and the expansion of Earned Income Tax Credit (EITC), the net cut in spending was estimated to be sizable, as it included spending cuts for defense and less essential programs.Footnote 35 Combined with the revenue increase through his tax package, his deficit-reduction plan was estimated to lower the deficit by $473 billion in five years, which was approximately as large as OBRA90.Footnote 36 Therefore, his commitment to deficit reduction was clear despite the new spending initiatives in the plan.
This seemingly strange combination of deficit reduction and increasing public investment can be explained by Clinton’s view that the budget and economy should shift their focus from “consumption to investment.”Footnote 37 He argued that by paying off public debt, the government would be able to invest more in jobs, education, and the future of the country; deficit reduction would increase private available savings and lower interest rates, which would make it easier for the private sector to invest more. Thus, the deficit-reduction plan and new spending programs were organized within Clinton’s larger vision to revitalize the American economy.
However, his decision to prioritize deficit reduction provoked controversy within the administration. Although Clinton had already announced that he would cut the deficit in his manifesto Putting People First, published during the presidential campaign,Footnote 38 it was unclear whether the administration was serious about deficit reduction until he unveiled the plan in the speech. Some members of the administration, such as political consultant Paul Begala and Secretary of Labor Robert Reich, worried that focusing on deficit reduction would betray Clinton’s campaign promises.Footnote 39 Indeed, Clinton abandoned a middle-class tax cut that he had promised to achieve a sizable deficit reduction.Footnote 40 Clinton may have been forced to choose a tough deficit-reduction plan because of policy experts’ advice. For instance, in December 1992, Chairman of the Federal Reserve Board Alan Greenspan told Clinton that deficit reduction should be the most important priority in economic policy making.Footnote 41 Woodward went on to vividly describe Clinton’s frustration about the fact that the success of his economic policy as well as his reelection “hinge[d] on the Federal Reserve and a bunch of fucking bond traders.”Footnote 42
Nevertheless, Clinton himself considered deficit reduction the most important agenda and willingly took this direction. On one hand, he was motivated by electoral incentives.Footnote 43 He had only achieved 43% of the popular vote in the 1992 election and was able to defeat Bush largely because of third-party candidate Ross Perot, who advocated balancing the budget and unexpectedly took 19% of the popular vote. Therefore, undertaking deficit reduction was a reasonable choice to attract Perot voters in the next presidential election. Moreover, Clinton believed that the deficit was at the heart of the American economic decline. In particular, he was deeply concerned about high long-term interest rates due to high public debt.Footnote 44 Thus, Clinton’s decision was based on his perception that deficit reduction would bring large economic benefits.
Regarding revenue, Clinton had already outlined his idea in Putting People First. He planned to finance investment programs and reduce the deficit “by cutting spending, closing corporate loopholes, and forcing the very wealthy to pay their fair share of taxes.”Footnote 45 When he announced his plan in February 1993, it turned out that “forcing the very wealthy to pay their fair share” was set to be the biggest part of his tax increase package. It created a new bracket of 36% on earned income above $115,000 and a 10% surcharge tax on people earning above $250,000, making the top tax rate 39.6%. The newly created brackets were largely targeted at the top 10% and 5% income earners at that time.Footnote 46 The administration expected that this individual income tax hike would bring in $123.2 billion for five years, which accounted for roughly 40% of the entire revenue increase from the tax package during the same period.Footnote 47
Despite its significance as the largest source of tax revenue increase, the Clinton administration viewed the top tax rate increase as a “noncontroversial” item.Footnote 48 Instead, what worried Clinton was the introduction of the BTU energy tax.Footnote 49 In particular, the administration was concerned that its introduction would cause opposition from the energy industry. Indeed, the BTU tax became the most contentious target of criticism during legislative proceedings and was eventually abandoned due to opposition by senators from oil-rich states such as David Boren (D-OK). In contrast, the BTU tax was accepted by liberal Democrats despite its regressive effect on low-income groups. This was largely because new poverty relief measures such as the expansion of Earned Income Tax Credit (EITC) and the food stamp program were introduced to alleviate the additional tax burden arising from the BTU tax.
The Democrat-controlled Congress was generally in favor of the Clinton plan. Democratic committee chairs such as Patrick Moynihan (Senate Finance Committee chair), Dan Rostenkowski (Representative from Illinois), and Robert Byrd (Senate Appropriations Committee chair) displayed a cooperative attitude toward Clinton and his administration.Footnote 50 Most rank-and-file Democrats seemed to accept the Clinton budget plan, except a few, such as Senator Richard Shelby, who expressed concern over its heavy reliance on tax increases.Footnote 51 As Democrats held 258 seats in the House and 56 seats in the Senate, the administration and congressional leaders believed that they had adequate margins to pass the legislation.Footnote 52
Furthermore, the public largely accepted the Clinton plan. Despite the anxiety among some members of the administration, the public did not seem to care about the abandonment of the middle-class tax cut at that point. According to a Times Mirror poll, 58% of Americans favored the plan and only 27% opposed the tax hikes and spending cuts in the plan.Footnote 53
Besides support from congressional Democrats and the public, the administration received favorable responses from some business leaders. Specific programs in the Clinton plan were welcomed by certain industries.Footnote 54 In particular, realtors and high-tech companies were given preferential tax treatment.Footnote 55 Furthermore, the investment programs at the time presumably played a role in attracting builders. However, the primary reason that businesses supported the Clinton plan was his commitment to deficit reduction. For example, John H. Bryan (chair and CEO of Sara Lee Corporation) announced on February 18, “[The plan is] courageous and a dramatic move to reduce America’s fiscal deficit.”Footnote 56 Some even agreed with Clinton’s approach to bringing down the deficit via progressive tax increases. The same day, August A. Busch III (chair and president of Anheuser-Busch) said, “We applaud President Clinton’s bold approach to reduce the deficit through spending cuts and higher taxes equitably levied … it will result in a reduction in the deficit, promoting a healthier economy and an improved standard of living for all Americans.”Footnote 57
Democratic acceptance, public approval, and support from businesses were all signs of a promising start for the administration. What could possibly go wrong? Only a few at this stage expected that the legislation would eventually only pass with a thin majority.
Conservatives Attack the Clinton Plan
Opportunities for the Republican Party to move policy making in its direction were quite limited in 1993. The Republican Party remained a minority party by sizable margins in both chambers, besides losing control of the White House. Worse, the administration and congressional Democrats employed a particular legislative procedure called “reconciliation” to avoid a filibuster in the Senate. Thus, using an important political instrument to block the main budget bill (also called the reconciliation bill) was prohibited in the budget process.Footnote 58
However, the Republicans unexpectedly got a chance to make their move. At the beginning of March, the Congressional Budget Office concluded that the Clinton budget plan exceeded the discretionary spending limit set by the Budget Enforcement Act of 1990.Footnote 59 Consequently, the Clinton administration had to abandon most of its long-term investment programs as well as submit a short-term supplemental bill separate from the main budget bill to alleviate short-term negative effects of deficit reduction. Although use of the filibuster was prohibited in the reconciliation process, this rule did not apply to supplemental bills. Republicans took advantage of this opportunity and tactically filibustered to block the stimulus bill, criticizing Clinton as a “‘tax and spend’ old liberal.”Footnote 60 This criticism damaged Clinton’s public image as a “New Democrat.”Footnote 61 The Republican attacks had a profound effect on the Clinton administration and Clinton’s approval rate plummeted.Footnote 62
The battle over the supplemental bill also led to widespread skepticism about the Clinton plan within the business community. John Sculley (CEO of Apple), who was an avid supporter of the Clinton plan, warned Chief of Staff Mack McLarty on April 26, “Since we met in your office, many CEOs have talked with me, and the news is not good. The President’s support in the business community hasn’t just slipped, it’s virtually collapsed!” Footnote 63 The administration was well aware of the tense atmosphere in the business community. Alexis Herman, director of the Office of Public Liaison,Footnote 64 wrote to McLarty on May 10, “As you are aware, the business community’s support for the administration’s initiatives has diminished since our very strong start in February.”Footnote 65
In such an edgy political climate, conservative Democrats in the Senate expressed their opposition publicly. Senator David Boren (D-OK), a member of the Senate Finance Committee, played an especially important role.Footnote 66 On May 20, Boren and Senator John C. Danforth (R-MO), joined by J. Bennett Johnston (D-LA) and William S. Cohen (R-ME), proposed an alternative reconciliation package that eliminated the BTU tax and imposed a cap on entitlement spending to make substantial spending cuts.Footnote 67 Before this recommendation, the BTU tax’s prospects had dwindled, largely owing to criticism from energy producers and heavy consumers of energy.Footnote 68 Despite the criticism, the administration still held a naïve hope that it could pass the BTU tax.Footnote 69 However, that hope was dashed by Boren’s opposition. As Democrats only held 11 seats out of 20 in the Senate Finance Committee, without Boren’s vote the tax bill could not be sent to the floor.
Following Boren’s initiative, conservative House Democrats also started to express opposition to the Clinton plan and demanded more spending cuts. To pass the reconciliation bill in the House, the administration attempted to make a deal with Representative Dave McCurdy (D-OK), an influential Democrat concerned about the Clinton plan’s heavy reliance on tax hikes and inadequate spending cuts. Through Chief of Staff McLarty’s tenacious efforts, McCurdy finally agreed to vote for the bill on the condition that deeper spending cuts and entitlement caps would be enforced.Footnote 70 On May 27, McCurdy and three other conservative Democrats voted for the bill, leading to it being passed with a slim majority of 219-213.
Subsequently, the stage moved to the Senate Finance Committee. With the BTU tax abandoned, the central task of the committee was to consider alternative measures and ways to reduce deficit, in addition to securing Boren’s vote to pass the bill. In a highly confidential meeting with Boren on June 10, the Clinton administration and committee members conjectured that the BTU tax could be replaced with a smaller gasoline tax increase and Medicare spending could additionally be cut by $20 billion.Footnote 71 Although Boren did not comment on the gasoline tax increase, he was satisfied with the additional Medicare spending cuts. After five days of negotiations, Boren voted for the bill on June 16.Footnote 72 Nevertheless, Boren had not committed to voting for the bill in the full Senate. With 19 Senate Democrats reserving their decisions a week before the vote, the passage of the bill was highly uncertain.Footnote 73 Consequently, Senate Majority Leader George Mitchell persuaded Boren to vote for the bill, resulting in a 49-49 tie.Footnote 74 With Al Gore’s tie-breaking vote, the bill was passed on June 24.
To resolve the differences between the House-passed bill and the Senate-passed bill, a conference committee was formed. Two primary issues were at stake here. First, some congressional members such as Senator Herb Kohl (D-WI) were nervous about the gasoline tax increase and were trying to reduce it.Footnote 75 Second, the move by the administration and Democrat leaders to cut more spending provoked resentment from liberal House Democrats who were loyal to Clinton.Footnote 76 As early as the beginning of June, Kweisi Mfume, a leader of the Congressional Black Caucus, wrote to Clinton saying that 38 members of the Caucus would vote against the bill unless the main provisions for low-income and middle-class citizens were maintained. Later in the month, 14 representatives from the Congressional Hispanic Caucus and 33 other representatives, mainly consisting of first-term members, also expressed their disappointment with the additional spending cuts.Footnote 77 Faced with this huge reaction from liberals, the administration and Democratic leaders in July partially restored the size of spending for programs such as EITC and food stamps while obtaining additional revenue by making the individual top tax rate increase retroactive to January 1, 1993.Footnote 78 It was inevitable that the Clinton administration’s decision to shift the budget package in a liberal direction would trigger conservative Democrats’ opposition. Given the slight margins in the past two votes, it was highly likely that the President’s budget package would be overthrown.
Business Interest Groups’ Opposition
Meanwhile, major business interest groups started making numerous requests to the Clinton administration and members of congress. Their primary message was that spending cuts were a better way to bring down deficits. As early as February, the Business Roundtable announced its opposition to the Clinton plan and argued that excess spending was the cause of the prolonged deficit and that tax hikes would not solve the problem.Footnote 79 The US Chamber of Commerce (USCC) was also in line with this argument and sent a letter on March 17, to every member of the House of Representatives stating that the budget package relied heavily on tax increases instead of spending cuts.Footnote 80
Business groups further complained about corporate tax hikes. The USCC and the Tax Reform Action Coalition (TRC) expressed concern about the negative effect of the top individual income tax rate increase on S-corporations, mainly consisting of small businesses.Footnote 81 S-corporations are classified as corporations by federal tax law; however, their income is attributed to their shareholders, who report the income on their individual income tax returns. Therefore, the top tax rate increase on individuals would apply to S-corporations. The USCC recommended that the administration exempt S-corporations from the top rate increase.Footnote 82 However, the administration did not accept this recommendation. Although the effect of this decision seems to have been limited in the initial stage of the legislative process, it became a heated issue in July.Footnote 83 In addition to USCC and TRC, groups representing small businesses, such as the National Federation of Independent Business (NFIB) and the National Association of Self-Employed (NASE), expressed reluctance in supporting the Clinton plan. Even though the administration stressed that 96% of small businesses were exempt from the new income taxes and that provisions were included in the plan to help small businesses, small business groups were not convinced by Clinton’s budget package.Footnote 84
The business groups’ complaints regarding the corporate tax programs in the Clinton plan were not just confined to the issue of S-corporations. They argued that businesses already paid their fair share and that additional tax burdens would negatively affect business growth. For instance, TRC stressed that an average corporate effective tax rate had been raised significantly due to TRA86 and refuted the argument that companies did not pay enough.Footnote 85 The NAM pointed out that the corporate tax burden significantly increased when the payroll tax was considered, despite a stagnant corporate income share in the economy.Footnote 86
Among the efforts of major business interest groups, those of USCC and NAM were recognized by the administration as effective threats to the passage of the bill. In particular, right before the final vote in the House, USCC distributed a letter to business leaders, asking them to sign it to pressure congressional members to vote against the bill. The letter said, “We urge you to oppose the conference report on budget reconciliation…. If enacted, the conference report would do severe harm to an already fragile economic recovery without promising much in the way of deficit reduction.”Footnote 87
Seeking the Business Community’s Support
Despite the united opposition of major business interest groups, the administration recognized that the business community was far from monolithic and not entirely represented by these groups. In May, Steve Hilton, a White House staff member of the Office of Public Liaison, wrote to other staff in the office that “some of NAM’s members are prepared to support the economic package dependent upon minor modifications to the BTU tax. Also, a number of companies who are members of TRC remain strong and vocal supporters of the economic package as a whole.”Footnote 88 Therefore, it can be inferred that the administration perceived that it was still possible to gain the business community’s support.
Dan Rostenkowski of the House Ways and Means Committee played a crucial role in gaining support from business leaders. In April, Rostenkowski met eight corporate CEOs, including John Young (former CEO of Hewlett-Packard), and asked them whether they would recruit other CEOs and actively support the tax package in exchange for the following three modifications concerning corporate tax provisions: increase the corporate tax rate by only 1% instead of 2%, remove Clinton’s investment tax credit proposal, and eliminate the deferral and royalties provisions proposed by Clinton,Footnote 89 which had been decried by business leaders despite their limited influence on tax revenue. As all eight CEOs agreed with this deal, on April 27, Rostenkowski recommended to President Clinton that the corporate income tax rate be increased by only 1% instead of the proposed 2% in order to secure passage of the reconciliation bill.Footnote 90
The eight CEOs’ support for the tax package except the corporate tax provisions implied that they accepted an 8.6% increase in the top individual income tax rate. So what explains their acceptance? A plausible explanation is that they recognized that the damage done by the tax increase would be acceptably small for the following two reasons. First, even if the tax rate increase were enacted, the top income tax rate would remain much lower than the pre-Reagan level. Second, due to lower tax rates applied to capital gains, some of the wealthy were able to avoid tax rates applied to their labor income.Footnote 91 It is well known that the lower tax rate for capital gains is a part of the reason why the average income tax rate for the top 400 taxpayers is lower than that for the top 20% of income earners.Footnote 92 As long as the share of capital gains in total income is large, the top income tax rate increase has only modest or even no effect on the average income tax rate. At this point, it is worthwhile pointing out that stock options were widely used in the latter half of the 1990s.Footnote 93
Nevertheless, the share of wage salary for those earning above $1,000,000 (approximately the top 0.01% income-earners in 1993) rose from 2% in 1993 to 3.4% in 1997 (to 6.1% percent in 2000).Footnote 94 Estimates also suggest that the average income tax rate for the top 0.001% income earners and top 400 income earners increased in the years after 1993.Footnote 95 Overall, some evidence suggests that the tax increase in OBRA93 made wealthy individuals pay more taxes.Footnote 96 Therefore, factors such as partisan inclination or political ideology might comprise part of the explanation for their acceptance of the deal.
Another interesting aspect of the corporate CEOs’ behavior is that although they embraced the top individual tax rate increase, they expressed a negative reaction to the corporate tax provisions including the 2% increase in the corporate tax rate. This seemingly strange reaction could be possibly explained as follows. In contrast to tax hikes on individuals, tax hikes on businesses are likely to have a direct effect on the economic and financial performance of companies. Specifically, the corporate CEOs might have wanted to avoid the corporate tax increase because they were under strong pressure to maximize earnings.Footnote 97 For these reasons, some corporate CEOs could be reluctant to accept corporate tax increases as leaders of businesses while supporting individual income tax increases based on their personal political ideologies. Moreover, ideological heterogeneity among executive board members in a company could also play a major role in influencing such decisions.Footnote 98
After the corporate tax modifications, Rostenkowski tried to solicit endorsements from corporate CEOs for the reconciliation bill. The administration called these new supporters “the Rosty group.”Footnote 99 On May 25, two days before the House vote, Rostenkowski released a list of 50 corporations and public interest groups that supported the billFootnote 100 (Table 1). The list included the original supporters of the plan as well as the Rosty group. In a press release, Rostenkowski announced, “This [support for the bill] proves there’s broad support for this bill throughout the nation … despite criticism that’s been voiced within the beltway. The American people realize that tax increases are a necessary component of any deficit-reduction package.”Footnote 101
Rostenkowski’s List of Corporations Supporting the Reconciliation Bill
Source: Letter to Dan Rostenkowski, May 25, 1993, folder: Budget Reconciliation Package I. A-N, binder 6, OA/ID 2649, box 16, Alexis Herman, Clinton Presidential Records Public Liaison, William J. Clinton Presidential Library.
Note: The shaded companies are among the top 100 companies in the 1992 Fortune 500 ranking. https://archive.fortune.com/magazines/fortune/fortune500_archive/full/1992/.
Corporations on the list not just announced their support but also joined forces to lobby legislators to vote for the bill. For instance, Marvin Womack from Procter &Gamble (P&G),Footnote 102 one of the largest corporations on the list, wrote to Alexis Herman on the evening of May 26 that “Procter & Gamble has lobbied very hard in favor of H.R. 2141. Earlier this week we contacted about 50 representatives … soliciting their votes in favor of the bill.” In response to Clinton’s request at lunch on the same day, P&G made phone calls to six members from Ohio to solicit their votes.Footnote 103 Procter & Gamble also made additional calls to other undecided legislators. Table 2 shows the list of legislators that P&G contacted on May 26, their opinions as of May 26, and their actual votes. After the lobbying, three out of five undecided legislators (Marcy Kaptur, Douglas Applegate, and John Tanner) voted for the bill and one legislator who was originally against the bill (Eric Fingerhut) voted for it. It is assumed that P&G strongly influenced the Ohio delegation, as its headquarters were located in Ohio, with some media stories illustrating its influence in the state.Footnote 104 Furthermore, because Marcy Kaptur and Eric Fingerhut continued their political careers in Ohio, they likely maintained a cordial relationship with P&G.Footnote 105 Business efforts, as exemplified by P&G, were highly likely to have contributed to the 219-213 passage of the House bill.
List of Legislators Lobbied by P&G
Source: Letter from Marvin Womack to Alexis Herman, May 26, 1993, folder: Budget Reconciliation Package I. A-N, binder 4, OA/ID 2649, box 16, Alexis Herman, Clinton Presidential Records Public Liaison, William J. Clinton Presidential Library, Govtrack.
Note: The shaded legislators are those who were initially undecided, against, or leaning in favor on May 26 but eventually voted for the bill.
The successful passage of the House bill confirmed that mobilizing support from business leaders is a crucial strategy to secure the passage of the bill.Footnote 106 While the administration reached out to many nonbusiness interest groups, it tried to solicit additional endorsements from business leaders instead of solely relying on “the Rosty group” and asked them to spread support for the Clinton plan.Footnote 107 On July 28, the administration invited 67 CEOs to the White House, and they expressed their endorsements for the Clinton plan.Footnote 108 A total of 55 of the 67 corporations were not on Rostenkowski’s list, which indicated that the administration had succeeded in expanding support from business leaders (Table 3). The administration also launched a strategy called the “State Opinion Leaders Program” and asked individual CEOs from different states to mobilize local or regional support for the Clinton plan and influence swing members of Congress.Footnote 109
Additional Corporations Not on Rostenkowski’s List
Source: Briefing memo, July 29, 1993, folder: Budget Reconciliation Package I. A-N, binder 1, OA/ID 2649, box 15, Alexis Herman, Clinton Presidential Records Public Liaison, William J. Clinton Presidential Library.
Note: The shaded companies were among the top 100 companies in the Fortune 500 ranking in 1992.
To examine the partisan inclinations of the CEOs (from companies listed in Tables 1 and 3), I calculated the ratio of political contributions each of them made to Democratic candidates and Democratic party organizations such as the Democratic National Committee to their contributions to both party candidates and organizations before 1992. Because 24 out the 105 CEOs either did not have records or made contributions no more than twice, they were excluded from the analysis.Footnote 110 As shown in Figure 1, the mode class of the ratio is between 0.95 and 1 and its frequency is 26 out of 81. Therefore, it is likely that the CEOs may have endorsed the bill out of their partisan loyalties.
Democratic Inclination of CEOs’ Individual Contributions.
Source: Federal Election Commission. See endnote 110 for a precise method.
However, it is important to note that motives to support the Clinton plan could vary from one CEO to another. Letters sent to Clinton in July from individual CEOs illustrated this point. For instance, Dwayne Andrea (Ratio: 0.27), CEO of the Archer Daniels Midland Company, clearly emphasized the plan’s economic benefits to the American economy as well as the world economy, saying “we observed … that the financial people changed their attitude toward the dollar and toward US bonds. I firmly believe that the change in foreign demand was largely responsible for the sharp drop in interest rates, which can give the whole world economy an enormous boost.”Footnote 111 August A. Busch III (Ratio: 0.21) reiterated his support and emphasized the fairness of the plan by saying, “While no one is happy about the sacrifices that deficit reduction requires, we applaud the fundamental fairness of your initial plan as well as the diligence with which you have worked to keep equity a cornerstone of the final product.”Footnote 112 Moreover, Mark R. Gustafson, a schoolmate of Clinton at Georgetown University, even though a Republican, wrote that “most thinking businessmen and women don’t mind paying their share if they feel the use of the funds is needed and appropriate.”Footnote 113
As was the case with P&G, the supporters lobbied legislators at the last stage of the legislation. A letter dated July 29 from Phillip Morris, another supporter of the Clinton plan, to Alexis Herman, indicates that the company cooperated with other companies and the Democratic National Committee and pressured legislators to vote for the bill.Footnote 114 Phillip Morris further prepared a list of the legislators that they contacted (Table 4). The data presented in Table 4 indicate that lobbying contributed to securing swing votes. For example, at Clinton’s request, George Mead, the CEO of Consolidated Paper, headquartered in Wisconsin (also one of the corporations listed in Table 3), called and visited Senator Herb Kohl (D-WI) in support of the final bill.Footnote 115 Furthermore, in response to the Office of Public Liaison’s request, Mead urged other business supporters in Wisconsin to express their support locally. As a consequence, Kohl voted for the final bill.
List of Legislators Contacted by Phillip Morris
Source: Letter from Kathleen M. Linehan to Alexis Herman, July 30, 1993, Budget Reconciliation Package I. A-N, binder 1, OA/ID 2649, box 15, Alexis Herman, Clinton Presidential Records Public Liaison, William J. Clinton Presidential Library.
Note: “Gas tax” here refers to a gas tax hike of 4.3 cents a gallon that was introduced to replace the BTU tax. Please note that the position section is copied verbatim from the letter. The shaded legislators were those who voted for the final bill.
There were detailed media descriptions of what happened in the days leading up to the final votes in the respective chambers. For the House vote on August 5, Representative Marjorie Margolies-Mezvinsky (D-PA) switched her vote from against to for, which led to its passage with a slim majority of 218-216. Because she had pledged against tax hikes during the campaign the last year, her decisive vote was expected to increase her electoral vulnerability. When she voted yea, Republicans reportedly chanted “Bye-bye, Marjorie.”Footnote 116 In fact, she lost her seat in the midterm election the following year. For the Senate vote scheduled the next day, as David Boren (D-OK) had announced that he would vote against the final bill in advance even if he voted for the bill in June, the administration needed more yea votes. Clinton persuaded Senator Dennis DeConcini (D-AZ), who had voted against the bill in June, in exchange for a cut in Social Security taxation and the establishment of the Deficit Reduction Trust Fund.Footnote 117 Senator Robert Kerrey (D-NE), who had demanded more spending cuts, also cast a yea vote with his remark “I could not and should not cast a vote that brings down your presidency,” resulting in a 50-50 tie.Footnote 118 With Al Gore’s tie-breaking vote once again, the final bill was passed in the Senate. As what Mezvinsky, DeConcini, and Kerrey received in return for their critical votes was marginal, their decision making was presumably influenced by their motive to avoid any devastating effects from Clinton’s own party.
The decisions of these three legislators have been featured in existing accounts, particularly one by Woodward. However, as the historical analysis presented in this paper indicates, the 218-216 and 51-50 majorities were not just attributable to them but also to other legislators, such as Democratic representatives from Ohio and Senator Kohl. Furthermore, behind these casting votes, there were numerous efforts of business leaders to persuade legislators to vote for the bill. Had it not been for their cumulative efforts, the final bills would have been voted down in all probability.
Discussion and Conclusion
This paper identifies an underlying force behind the unprecedentedly competitive political battle over the US budget in 1993: Democrats’ mobilization of corporate leaders to lobby key legislators.Footnote 119 These corporate leaders supported the Clinton plan even though major business interest groups heavily criticized the plan’s reliance on tax increases, establishing a clear distinction from previous business mobilization and lobbying over the tax politics during the Reagan and Bush presidencies. During the two presidencies, business groups accepted tax hikes to lower deficits, which suggested that the problem of deficits provided a compelling reason behind their support for tax hikes. In 1993, however, this tactic no longer worked because the business groups rejected the tax increase measures Clinton proposed. In this circumstance, individual corporate leaders showed up and lobbied in favor of the plan, creating a counterforce against the business groups’ opposition.
Moreover, these corporate leaders accepted the top income tax rate increase as a measure to reduce the deficit. This paper argues that the reason why they accepted that the tax increase could be associated with their economic strategy as well as their partisan inclinations. Most of them believed that deficit reduction would help reduce interest rates and create a better economic environment. Furthermore, some of them might have considered that the tax increase would not hurt them too much because of preferential treatment for capital gains. As for their partisan inclinations, available data suggest that it might have influenced some of their motives to support the Clinton plan. Because it is assumed that a person inclined toward the Democratic Party tends to support redistributive policies, the supporters’ inclination toward the party provides a convincing reason behind their support for the Clinton plan instead of plans that relied more on spending cuts and regressive taxation. Recent studies suggest that these corporate leaders are not an anomaly, and indeed a nonnegligible number of corporate CEOs are inclined toward the Democratic Party.Footnote 120 Therefore, examining the relationship between business leaders, high-income earners, and the Democratic Party is an important research agenda in the contemporary American political economy.
Overall, the analysis presented in this study suggests that obtaining support from low-income and middle-class voters to soak the rich is not the only pathway to achieving progressive taxation.Footnote 121 Indeed, as some scholars suggest, the middle class has been an important part of protests against taxes on high income and wealth, albeit they are not themselves subject to those taxes.Footnote 122 In such circumstances, mobilizing support from high-income earners and representatives of the business community becomes an effective weapon for policy makers who seek to distribute more tax burden onto high-income earners. Furthermore, gaining support from groups or individuals whose taxes would increase determines the long-term prospects of taxes.Footnote 123 Imposing higher taxes on some groups without obtaining their consent will inevitably cause a backlash against the taxes. Progressive taxation targeting high-income earners is not an exception to the case. Assuring support from high-income earners makes graduated tax rates more resilient to the conservative tax cut agenda and enables policy makers to maintain revenue capacity.Footnote 124
However, it should be noted, the present analysis cannot be easily applied to situations other than deficit reduction, such as expanding social spending. Without a broad consensus on the need to contain deficits, the corporate CEOs might have acted differently. More importantly, because macroeconomic environments have drastically changed during the past two decades, the logic used by the Clinton administration that deficit reduction would lower interest rates and help the economy grow does not seem to work in the current times. In this macroeconomic environment, policy makers might face difficulty in obtaining support to increase taxes as Clinton did in 1993. Nevertheless, it is certain that examining how deficits play a role in forming tax and spending policies comprises a pertinent research theme. In doing so, the current case of OBRA93 can be considered a successful measure to attract support for tax increases in the context of deficit reduction.
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