Soaking the Rich Tax Cuts
Posted by ssbg on August 19, 2006
Guess who is paying more in taxes now?
Wednesday, July 12, 2006 from Wall Street Journal Yesterday’s political flurry over the falling budget deficit shows that even Washington can’t avoid the obvious forever: to wit, the gusher of revenues flowing into the Treasury in the wake of the 2003 tax cuts. The trend has been obvious for more than a year (see our May 23, 2005, editorial, “Revenues Rising“), but now it’s so large that Republicans are trying to take credit while Democrats explain it away.Republicans do deserve some credit, though not exactly the way they’re claiming. Democrats are right that the White House February estimate of a $423 billion budget deficit in Fiscal Year 2006 was inflated, perhaps to be able to claim progress later this election year. Also not very important is the White House claim that it has already met its second-term goal of “cutting the deficit in half.” That was always a minor and political ambition.
The real news, and where the policy credit belongs, is with the 2003 tax cuts. They’ve succeeded even beyond Art Laffer’s dreams, if that’s possible. In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters–three full years–since the tax cut passed, growth has averaged a remarkable 4%. Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses shell-shocked by the dot-com collapse, 9/11 and Sarbanes-Oxley.This growth in turn has produced a record flood of tax revenues, just as the most ebullient supply-siders predicted. In the first nine months of fiscal 2006, tax revenues have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office recently noted, “That increase represents the second-highest rate of growth for that nine-month period in the past 25 years”–exceeded only by the year before. For all of fiscal 2005, revenues rose by $274 billion, or 15%. We should add that CBO itself failed to anticipate this revenue boom, as the nearby table shows. Maybe its economists should rethink their models.
Remember the folks who said the tax cuts would “blow a hole in the deficit?” Well, revenues as a share of the economy are now expected to rise this year to 18.3%, slightly above the modern historical average of 18.2%. The remaining budget deficit of a little under $300 billion will be about 2.3% of GDP, which is smaller than in 17 of the previous 25 years. Throw in the surpluses rolling into the states, and the overall U.S. “fiscal deficit” is now economically trivial.
This would all seem to be good news, but some folks are never happy. The same crowd that said the tax cuts wouldn’t work, and predicted fiscal doom, are now harrumphing that the revenues reflect a windfall for “the rich.” We suppose that’s right if by rich they mean the millions of Americans moving into higher tax brackets because their paychecks are increasing.Individual income tax payments are up 14.1% this year, and “nonwithheld” individual tax payments (reflecting capital gains, among other things) are up 20%. Because of the tax cuts, the still highly progressive U.S. tax code is soaking the rich. Since when do liberals object to a windfall for the government?
The other favorite line of critics yesterday was summed up by North Dakota Democrat Kent Conrad, who said the deficit would still “explode” in the long term because of the “coming retirement of the baby boom generation.” But this is a political bait-and-switch. When Senator Conrad had the chance to do something about the “long term” by reforming Social Security in 2005, he refused. But now that the tax cuts he opposed are reducing the short-term deficit, he’s back to fretting about the long term. At least Mr. Conrad is consistent in wanting a tax increase.
There surely is a long-term budget problem, driven largely by fast-growing entitlements for seniors. Federal spending is still climbing by 8.6% this year, with Medicare alone growing at an astonishing rate of 15.5%, or $33 billion in the first nine months of this fiscal year (which ends September 30). Thank the GOP prescription drug benefit for that future taxpayer burden. The only solution to the entitlement problem, short or long term, is to reform both Medicare and Social Security.
As for the 2003 tax cuts, the current revenue boom is one more argument for making them permanent. They are now set to expire in 2010, and, even if they are extended, federal revenues will continue to climb as a share of GDP as more taxpayers earn higher incomes and move into higher tax brackets. If liberal Democrats are really determined to soak the rich–and we don’t doubt it for a second–they’ll also vote to make the tax cuts permanent.