Windfall for Washington
July 15, 2005; Page A10
WSJ.com
Let's see if we can get this straight: When tax revenues fall and budget deficits go up, it's bad news. But when tax revenues rise and deficits decline, it's still bad news.
At least that seems to be the way a sizable chunk of Washington is reacting to this week's report from the White House budget office that the federal deficit is down by nearly $100 billion this fiscal year, that the deficit as a share of GDP is down to 2.7% (very near its historical average), and that this is all happening because tax receipts are surging by more than 14%. Uncle Sam is having a better year so far than even Paris Hilton, but half of the Beltway is depressed.
John Spratt, the ranking Democrat on the House Budget Committee, seems especially upset that this revenue surge isn't coming from wage income, but rather from investment income -- that is, the so-called "non-withholding" income tax collections which have skyrocketed by some 30% this year. "These are typically taxes paid on one-time capital gains, bonuses, stock-options income that may not recur," he laments.
Well, sure, Congressman, the 2003 reductions in the tax rates on dividends and capital gains seem to be resulting in much higher tax revenues on ... dividends and capital gains. This is called the Laffer Curve effect, and we thank Mr. Spratt for validating it. If he wants those revenues to "recur," maybe he'll even vote to make those tax cuts permanent.
[Revenue Rebound]
This revenue surge from investment income also rebuts the mantra that the 2003 tax cuts were a giveaway to the rich. Nearly half of all Americans have some kind of stock ownership, and thus have shared in these gains in investment income. And if most of the extra tax income is coming from capital gains and dividend payments, that would have to mean that the rich in America are paying more taxes, not less, as a result of the 2003 tax cut.
By the way, we don't recall Mr. Spratt and other Democrats lamenting when a similar spike in taxes from investment income was boosting tax revenues to historic heights as a share of GDP during the dot-com bubble of the late 1990s, as per the nearby chart. Then it was all said to be an economic miracle; now it's a windfall for the wealthy. This selective budget criticism couldn't be related to who's sitting in the White House, could it?
There is a looming budget problem, but it has nothing to do with the Bush tax cuts or insufficient tax revenue. It is a government spending crisis, especially the liabilities that politicians have promised to retirees in Social Security and Medicare. The Congressional Budget Office predicts that spending as a share of our national output based solely on current promises will surge from about 20% today, to 25% in 2025 and to 34% by 2040.
In order to balance the budget at those spending totals, we would have to double the highest income tax rate to 70%, raise payroll taxes to 30%, and the corporate income tax rate would rise to twice the average of U.S. trading partners. Or if we tried to borrow to finance all this spending, our debt ratings would slip to junk bond status, according to an analysis by Standard and Poor's.
Republicans share a hefty part of the blame for creating the most fiscally unaffordable new spending program in the past quarter century: the Medicare prescription drug bill, with an unfunded liability that is larger than the GDP of every other country in the world.
But the "deficit hawk" Democrats have been equally disingenuous. Most Democrats who voted against President Bush's prescription drug bill did so because the multi-trillion-dollar plan wasn't generous enough to seniors. They have also rejected every overture by Mr. Bush to shore up Social Security's long-term finances, even a proposal to trim future benefits for wealthier retirees. Every White House proposal to cut spending in this year's budget -- agriculture subsidies to upper income farmers, slight cutbacks in Medicaid payments, reductions in Amtrak subsidies, a decline in pork barrel highway projects -- has been rejected by the "deficit hawks" in Congress.
So thank heaven for the tax cuts that have helped to spur the economy that is now throwing off higher tax revenues. As the chart shows, those revenues are now rising back to their modern average as a share of GDP, just as supporters of the tax cuts predicted. And if the tax cuts are made permanent, and as the economy grows and incomes continue to rise, Americans will be paying even more in taxes as they move into higher tax brackets. The real windfall here isn't for the rich but for Washington. Instead of griping, Mr. Spratt ought to be doing cartwheels.
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