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Press Briefing by Chair of Council of Economic Advisers, Laura Tyson

April 15, 1994

The Briefing Room

2:55 P.M. EDT

DR. TYSON: Good afternoon. Today, being April 15th, a day when millions of hard-working men and women in the country file their tax returns, it seemed appropriate to discuss the impact of the President's economic plan on taxes paid by the American people, and on the state of the American economy.

Just some basic facts on taxes. These are now facts which most Americans will recognize because they now have filed their taxes or are about to. The facts are as we have stated them: only 1.2 percent of American households, those with adjusted gross incomes in excess of $185,000, have had their income tax rates increased. That means that 98.8 percent of American households have not had their income tax rate increased. There has been no increase in the income tax rate for the middle class.

In addition, 50 million American households -- that's 16 percent of the total -- are not eligible for an expanded earned income tax credit, a way to reward hard-working Americans who work full-time, bring their families out of poverty, and reward them for working hard.

Finally, on the small business side, 90 percent of small businesses are eligible for tax cuts this year. Only four percent of small businesses face higher tax bills as a result of the higher income tax rates.

So those are the facts; facts that we have stated throughout the preceding year. But I think on tax day, as people have filed their taxes, those facts can be easily recognized.

Another point I want to make on the tax side is to recall that the tax plan we introduced last year was part of the deficit reduction package, and we've already seen results on the deficit from that package. With our fiscal year 1995 projections, we project three years of declining deficits, the first three-year period since Harry Truman was President. The deficit relative to GDP, the deficit GDP ratio has -- will decline in 1995, fiscal year 1995, to the lowest level since 1979 and will be cut nearly in half. The debt to GDP ratio, which had been on a steady increase since 1981, will stabilize and then begin to fall.

So we have fundamentally changed the course of the deficit and the debt relative to the size of the economy. Now, the economy has, itself, responded to the deficit reduction budget plan put in place. Once again, if you look at the recent economic numbers, the numbers are good. They confirm our forecast which is, in fact, consistent with the forecast in the private sector. The economy is on a solid growth path with modest inflation.

We predict that the economy will grow this year at about 3 percent, with a CPI inflation rate of about 3 percent. Most private forecasters are about with us. Many private forecasters are increasing their growth rate projections for this year, but not increasing their inflation projections for this year.

Over the longer term, we believe the building blocks for a sustained period of moderate expansion with modest inflation are firmly in place. We live in a world now with declining deficits relative to the size of the economy; sounder balance sheets; stronger productivity growth; and robust investment. And these are the foundations on which sustained economic growth depend.

Thank you. Questions? Yes.

Q: When you say the rates haven't changed on the middle class, how do you take into account the movement of the threshold? In the $21,000 range for adjusted growth, for instance, it moved down about $500 this year to a lower group. And, therefore, for those people, the rate changed for those dollars.

DR. TYSON: I would say the following. Basically there's no disagreement with the assertion that we have made that basically four -- people move all of the time in terms of their family income level and their taxable income. I mean, there's a gross adjusted income and there's a taxable income. Families move up and down in those tables. What we did was adjust the tax rates, and with our projections of where people would be -- incidentally, projections that were confirmed by the CBO and confirmed by most of the private accounting groups that looked at this -- our projections were that the higher tax rates would affect only those families whose adjusted gross incomes were $185,000.

Now, where you are in terms of taxable income -- you can't make a prediction where you are in terms of taxable income because the adjustments differ from family to family.

Q: What if you move it? If a family made exactly the same number of dollars last year -- a really lower-middle-class family, or even a poorer family that was in a low $21,000 range -- they don't have to move; the rate moves this year, the threshold moved down. And therefore, they're into a different bracket without any change in income. Do you call that a change in rate?

DR. TYSON: No, no. We don't think that's true.

Q: You don't think it's true, or you don't think it's a change in rate?

DR. TYSON: It's not a change in rate and I also think -- both things are true. It's not a change in rate, and it's apparently also factually not correct. But we can check on the factual -- since I would say both things are not true, one we know for sure, one we think not true, we'll check on that.

Q: The opposite happened. At the high end of that scale, the bracket moved out about $3,000 and actually reduced the marginal rate for the people at the high end of that scale. But there were people affected the other way.

DR. TYSON: Well, we should check that. You don't think that's true? I have never heard that. This is the first time I ever heard that, so --

Q: Nobody in here makes that kind of money. (Laughter.)

DR. TYSON: I doubt that very much since what I would say in response to that is the one -- we looked very carefully at the bottom end of the table. In particular, one of the basic objectives of our tax plan was to reduce the deficit with greater tax fairness. We paid particular attention to what was happening at the bottom end of the income distribution, which is why we were so intent on having a major expansion of the earned income tax credit. So I don't accept the notion that we would not have paid attention to that part of the income distribution, regardless of what any individual here -- where they appear in the tax tables.

Q: Dr. Tyson, what do you make of today's industrial production figures, and do they add to the argument in any way that is being made by some of the circles at the Fed who are concerned about inflation heating up the economy, heating up and inflation heating up, and the interest rates should go up?

DR. TYSON: Well, I basically have already pointed out -- I looked at the reports for this week. We had two price reports; we had a retail sales report; we had industrial production report. Put those all together and it would lead us to say what I have now said a number of times, but I'll just repeat it.

This is evidence of solid growth, and it's evidence of modest inflation. The industrial production index increased; it was a strong increase. It was below what analysts had expected, however. Capacity utilization did increase; again, it increased somewhat less than analysts had expected. Several industries did pick up in terms of industrial production in March. Part of that pick-up was a result of depressed levels in January and February as a result of weather. There was a slight dip in output production levels in a couple of industries.

So overall what you'd say here is that this is solid growth. But it's growth -- then I think I should combine that assertion, or view, with the evidence coming in on the inflation side. And the evidence coming in on the inflation side basically this week was, I think, consistent with our view that this is going to be a year of modest inflation. We may see, as we predicted, later on this year, some up-tick in inflation. It's a little early to tell, but it would be certainly within our forecast and within the forecast of most private sector analysts. But one would characterize any increase this year as likely to be modest, and the overall inflation rate as likely to be modest.

So the numbers confirm where we've been for quite some time on our view of the economy.

Q: What are your concerns about the talk now of another increase in short-term interest rates next month?

DR. TYSON: I have no comment on this. I have no way to know what's going to happen to short-term interest rates next month. And if I did, I would simply say that the Federal Reserve presumably has access to the same evidence that we have about the state of the economy, and they can look at the evidence; and it's their responsibility to make a decision about their policy agenda.

Q: Dr. Rubin said yesterday that his instinct is that growth is going to be apparent to be higher than 3 percent this year. You're going to adjust your forecast anyway, I guess, soon -- you're probably in that process. Don't you think -- and from your own analysis that growth is going to be higher than 3 percent this year, or the blue chip is at 3.7 percent, and the related question -- are you more settled in your own mind as to why long bond rates have gone up so much since last October?

DR. TYSON: Okay, the first question on, do I want to predict our forecast? I don't want to predict our forecast. We have not yet started the process, although the people most responsible for the process are here with me today; and we will probably start that process sometime within the next few weeks.

It's the case -- as I have said repeatedly -- that this year we always felt that the chances of our forecast coming in under what the economy actually did were greater than the chances of our forecast coming in over what the economy did. So, in that sense, I'm on record with the view that it's more likely that the economy will grow more than our 3 percent than less than our 3 percent this year. The evidence from the first quarter does suggest a growth rate of over 3 percent for the first quarter. But you have to realize that that's one quarter of four quarters.

So, in any event, we don't have a prediction to make of our forecast right now. But those are my observations of where we are.

On the issue of long-term bond rates, I don't think that -- I and others who have talked about this have raised a number of reasons why long-term interest rates may have increase -- I mean, have increased. A number of hypotheses have been offered. I don't think at this point one knows for sure what weight to give each of those. And the ones that I have mentioned are stronger than expected momentum in the economy; clearly, to the extent that the first quarter proves to be stronger than three and the year proves to be somewhat stronger than three, that expectation that the economy is growing stronger than anticipated would be one reason why long-term interest rates increased.

Another might be, as I've said, an increase in inflationary expectations. So far, here the numbers on what's actually happening to inflation do not suggest any reason for an increase in inflationary expectations. But expectations are expectations. You can't really predict them or explain them that easily, and that may be part of the issue.

And then, finally, there are other issues such as various events which might have triggered some major adjustments in hedge funds that had some effect on financial markets both here and, to some extent, in the rest of the world.

I don't think I'm ready yet -- I don't think anyone really is ready yet to sort of parcel out which share of the explanation goes with any of those factors.

Q: Recognizing that the administration rarely wants to comment on interest rates, let me ask you again a version of what Peter asked a minute ago. The elements that you say argue against higher interest rates really had been fairly constant throughout the year and the end of last year. The President has been making these arguments and interest rates continue to go up. They're creeping around now to where they were when you came into office, which is going to begin to begin to cost you the gains that we've enjoyed on the budget deficit. Would another increase in interest rates begin to threaten that? Would it be serious enough that --

DR. TYSON: You have to take into account both the increase in rates and how long the increase would persist, and also, what you think the growth rate of the economy is with those interest rates. So, for example, if, as some forecasters think, growth this year is above three percent, one could imagine the deficit numbers coming in exactly as we predicted them or even better because, even though interest rates are somewhat higher than predicted, so is growth higher than predicted. That scenario gives you a neutral-to - improving effect on the deficit.

So I think at this point, our reading of the economy suggests that right now developments are probably a wash, all right; that growth -- we think growth will be stronger in the first quarter than anticipated; interest rates are higher than we anticipated -- both things are true. If you factor that in right now, it's a wash.

It's important to point out that a lot of the projections on the deficit over the five-year budget window depend very much on what you assume about whether current rate increases, particularly at the long end, are permanent, they're going to come down, or they're going to go up more. And I don't think right now -- it's very hard to predict which of those things will be true.

Q: Can you count more, though, on interest rates than you can on getting the -- on the kick in growth?

DR. TYSON: In what sense? I'm not sure I understand.

Q: Well, I mean, perhaps I'm answering my own question in the negative. When interest rates were low, I mean that was solid. You knew you were making gains at the deficit. Now they're creeping up and you've got to count on accelerated economic growth, which puts even more pressure on the interest rates.

DR. TYSON: Well, look. You have to recognize here that basically there are certain components of the deficit which are sensitive to the economy and the state of the economy, and certain components of the deficit that are under direct fiscal policy control. What I will say here is that we have done -- independent of the state of the economy, by a series of tax adjustments and a series of spending cuts in a variety of programs over time, we have adjusted those parts of fiscal policy which a government can actually control to bring the deficit down.

Whether the deficit in any given year is this number or that number is not totally under the control of the federal government because it is partly under control of the state of the economy. We believe our deficit reduction package, both brings the deficit down relative to the size of the economy over time, and puts the economy on a good foundation for sustained economic growth. Since we believe that, we believe the deficit numbers will continue to come in showing improvement.

Q: Dr. Tyson, how would you persuade the Americans in that 1.2 percent that this administration promotes tax fairness?

DR. TYSON: I would say the main reason it's important to emphasize that our tax program was a part of deficit reduction. Given the need to reduce the deficit, which the American recognized and put high priority on, we tried to develop a balanced and fair way of doing that. Balance means balance between tax increases and spending cuts. It means balance across spending programs -- we have in our spending cuts both discretionary and mandatory programs are affected.

On the tax side, it means, essentially, looking to adjust rates in such a way that those at the top end of the income distribution who gained the most over the past decade of economic growth, and who can afford most to pay higher income tax rates, they're the higher rates. And those at the bottom end of the distribution, who clearly were worse off in the last decade, and who clearly are least able to pay higher taxes because many of them --the 16 percent of households working, eligible for the earned income tax credit -- cannot, even with full-time work, raise a family with children out of poverty.

So that's what fairness is about. It's saying, okay, given that we have to reduce the deficit and we have to do it in a balanced way, where have the gains been the greatest, where have they been the least, and where is the ability to pay the greatest and where is it the least?

Q: Do you know offhand how much money is now in the President's deficit reduction trust fund?

DR. TYSON: I do not have a count of that right now. I do not have a count.

Q: Is it ready?

DR. TYSON: Oh, I'm sure there's a count; I'm sure Leon Panetta could give you a count right now. I could not. I could not.

Q: markets seem to be listening more to the Fed than to you about the state of the economy. How do you get the American investor to accept your rosier picture? And does it bother you that investors are just listening to the Fed instead of to the administration?

DR. TYSON: I don't know who -- you'd have to ask investors who they're listening to. I try to -- one of the functions of the Council of Economic Advisors, a major function of the Council of Economic Advisors, is to provide objective and analytical reading of the evidence as we see it.

So, for example, if we write a piece -- as I wrote today in the New York Times -- talking about we look at the evidence on inflation and this is what we see, that is out there to inform investors, inform the American public, inform educators of what our reading of the evidence suggests. That is a task that we do. I hope that the arguments are convincing.

Q: But on the front page of the New York Times, Dr. Tyson, there was an article that essentially was taking the spotlight away from the editorial that you wrote.

DR. TYSON: I don't know who read which article. Maybe people read both; I'm not sure. That's your interpretation of how people read the newspaper. I don't know how people read the newspaper.

Thank you very much.

END 3:13 P.M. EDT

William J. Clinton, Press Briefing by Chair of Council of Economic Advisers, Laura Tyson Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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