In 1993, Bill Clinton convinced working people that he was on their side, by raising the income tax rate on high income earners to 39% as part of the Omnibus Reconciliation Act. But this only applied to regular income. For Wall Street, the 28% rate Reagan slapped on them was reduced to 20% .
Wall Street is special. They don’t have to pay the same tax rate that us regular people do. For most of the 20th Century, and all of the 21st so far, Wall Street gets a special lower tax rate called the “capital gains” or later “dividends rate”. Up until the Reagan years, the income tax rate could be as high as 92%, while Wall Street could get away with a top bracket of 20%. After exemptions, a millionaire could pay nothing, while a bus driver paid 10%, according to Ronald Reagan himself.
Between the two tax reforms passed in the Reagan years, the field was finally leveled. There was a lower tax rate for lower income earners of 14%, and a higher rate for higher earners of 28%. There was a weird third bracket of 33% that applied to certain upper income earners. Most importantly, it made the “capital gains” rates equal to the regular income tax rates, ensuring that Wall Street, investment bankers, or other finance sector earners, would pay the same tax rates as doctors, mechanics, bus drivers, and the rest of us who are too busy working for a living to lobby Congress for special treatment.
But it wouldn’t take long for Bill Clinton to undo Reagan’s hard fought victory for working Americans.
In 1993, Bill Clinton convinced working people that he was on their side, by raising the income tax rate on high income earners to 39% as part of the Omnibus Reconciliation Act. But this only applied to regular income. For Wall Street, the 28% rate Reagan slapped on them was reduced to 20% . So, if you were a doctor, for example, earning a comfortable income, but working long hours, saving lives, etc. you’d likely pay in the low 30s or high 20s after exemptions. But if you were a Wall Street investor, buying a stock one hour and selling it the next for a profit, never producing anything, never providing a service that actually benefits the economy, just making a fortune betting on the minute by minute change in the value of stocks; you’d pay no more than 20%, and likely much less after exemptions. While Clinton did provide some tax relief for the lowest income groups, the special break for Wall Street is unforgivable.
If you increase taxes on certain behavior, you likely cause a reduction in that behavior. If you lower taxes on certain behavior, that behavior increases. With that in mind, let’s look at the stock market crash of 2000. Much of the tech boom was fueled by speculation. People bought stocks in all kinds of tech companies represented by the NASDAQ index. If you were smart, you could buy stock in Lucent Technologies in 1994, hold it a few years, and sell it for 4 times what you paid or more. This link goes to an actual PDF spreadsheet of Lucent’s Stock values by day/month/year. You’ll see it begin at $5.86 in 1996, and by late 1999, it was peaking just above $60 a share. I’m not cherry-picking. Lucent is only one of many such tech companies that followed similar trends. The NASDAQ overall soared above 5,000 points in March, 2000 before the crash. By Dec. of 2000, it was less than half – Merry Christmas!
You see, stocks, in theory, are supposed to be investment money for companies. If I own a company, I might sell ten thousand stocks. I take that money, invest it in my company, and pay the stock holders a dividend. So the stock holders make money, I make money on their investment, and everyone wins, right? If I want more investors, I raise the price of the stock. The shareholders not only profit from the dividends, but also the rising value of the stock itself. These tech stocks didn’t work that way. The price of the stocks themselves soared, but they rarely paid dividends. That should tell you that these tech companies weren’t actually investing the money. They were just sitting on the stocks, waiting for them to peak, and then selling them off. Clinton didn’t cause this, of course. But by lowering taxes on them, he incentivized this behavior. Meanwhile, those of us who worked for a living had to pick of the slack by paying a higher rate of taxes for our honest income.
Not only did Bill Clinton put Wall Street above Main Street, he also cozied up to the big banks, which were largely responsible for the Great Recession of 2009. In 1999, no longer eligible for re-election, nor worried about mid-term Congressional elections during his term, Clinton signed the very controversial Gramm-Leach-Bliley Act , which repealed Glass-Steagall. (In English, Wag!) OK, stay with me.
Risky Business of Bill Clinton
Let me break it down for you. During the Great Depression, the Glass-Steagall Act was created in order to avoid another bank failure. This act kept banks from using the savings of ordinary people and businesses for risky investment banking. Those who wanted to engage in such risky investment banking could separately invest, accordingly. If they lose, they lose. But it ensured that Grandma’s hard earned life savings were only invested in safer loans. When you put money in a savings account, banks will loan most of it out. When banks give loans for homes, cars, etc. they charge interest for two reasons.
To make money for themselves and to pay the interest due to those with savings.
If they issue say 1,000 loans, and they figure that maybe 10 of them will default, the interest on the other 990 loans will cover that loss and then some.
This is fine. That’s how banking works. But when they take that money and also engage in far more risky behavior, they could make far more money, while still paying the nominal amount of interest to the savings account holder. They could also lose so big that they don’t have enough to honor the savings account balances anymore, and…Great Depression of 1929…Great Recession of 2009…you get the idea.
Glass-Steagall kept the banking sector stable for over a half a century. But at the stroke of a pen, Bill Clinton repealed it. I’m sure many Democratic Party loyalists are fuming right now. When I’ve explained these things to them, they blame Congressional Republicans and say that Clinton just reluctantly went along with them. By his signing statement he didn’t seem reluctant. I’m not here to let Congressional Republicans off the hook.
But Clinton didn’t have to agree to this, yet he did. Even if he didn’t want to, it still shows weak leadership, if not terrible judgment and an inability to learn from history’s mistakes. A deeper look into Bill Clinton’s support while he was running for President shows that he had little incentive to resist the will of the banking sector. Clinton had the backing of several high ranking Goldman Sach’s executives, including the campaign financing they offered. All the while, Clinton publicly spoke vagaries of how he wanted to “end the greed that consumed Wall Street and ruined our S&Ls”, the Savings and Loans.
Bill Clinton indeed was a pro-bank Democrat. The decisions made by Bill Clinton during those years of artificial prosperity have bitten us like a snake in the grass. Risky behavior led to these “too big to fail” banks, and is at least partly responsible for the Great Recession of 2009.
Please also consider an article I have written , which focused on Bill Clinton’s devastating trade deals that crippled America’s manufacturing sector