This May Be a Bad Year for the Tax Man
The New York Times
April 19, 2002
FLOYD NORRIS
If the government were a business,
its management would now be
trying to decide whether to issue a
revenue warning.
Tax season is not just a time of misery
for those who have to pay. It is also the
time when the government learns just
how much money it will have available
to spend. So far, this year's numbers
look bad for the government.
Throughout the 1990's, the news was
almost always good. Tax receipts as a percentage of the gross domestic product
went up, and up, and up, not because of higher tax rates but because a bigger
share of national income was going to the well-off, who pay higher marginal tax
rates. Many more stock options - whose profits are taxed at ordinary income tax
rates - were being exercised as the stock market boomed. Capital gains tax
payments also soared with the bull market.
That those trends have reversed is no surprise. The question has been the extent to
which tax revenue will be affected. Some people, this columnist included, have
suspected that the experts who estimate tax revenue grew far too optimistic in
recent years and underestimated the likely declines in the post-bubble year of
2001 and later years. One indication that that might be true came from the
Investment Company Institute, the trade group for mutual funds. Its preliminary
tally shows that mutual funds distributed $23 billion in capital gains to taxable
accounts in 2001, down 83 percent from the previous year.
Over all, tax payments will not be down anything like that.
But the federal budget deficit for March was significantly
higher than expected, because of lower tax collections.
And John Youngdahl, a Goldman, Sachs economist,
points out that through Wednesday, the Treasury received
$33.4 billion this month from individual income- tax
payers, off 31 percent from a year ago.
"In the late 1990's, every year tax receipts were sharply
higher than expectations," Mr. Youngdahl said. "Now
comes the payback, and it could be a rather severe shock
to many people."
It must be acknowledged that the current numbers are
not conclusive. Most of the money that comes in during
April arrives in the final two weeks, for the obvious reason
that those who owe money tend to put off mailing their
checks until the April 15 deadline. Perhaps more
taxpayers delayed filing this year, or perhaps the Internal
Revenue Service is not doing as good a job of getting the
checks deposited. Maybe there will be a surge in
payments in coming days.
But it is also possible that Uncle Sam faces a number of
disappointing years for tax receipts. The stock market
boom - particularly the bubble in shares of unprofitable
Internet companies that paid no taxes and thus could not
use the deductions generated when their executives
cashed in stock options - may have created a tax boom
that will never be seen again.
If so, budget deficits will be bigger than anyone expected,
and so will government borrowing. The idea of a shortage
of Treasury bonds - only recently a Wall Street worry -
will seem quaint. Congress and the president will face
difficult spending decisions.
It would be nice if one result was that the politicians acknowledged that using
10-year budget forecasts in passing tax bills is as ridiculous as Enron's use of its
electricity-price forecasts in calculating its profits. Even if the estimates are
completely honest, they cannot be made with enough accuracy to be trusted.
As it is, House Republicans - having made last year's tax cut seem smaller than it
was by providing that tax rates would rise in 2011 - voted yesterday to repeal
those increases. Could it be they want to act before this year's tax receipts lead to
new deficit forecasts? In any case, it is absurd to set 2011 tax policy in 2002.
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