Revenue Revelation
May 10, 2006; Page A18
House and Senate GOP conferees finally agreed yesterday on extending the 15% tax rate on dividends and capital gains for two more years through 2010. This means you can expect lots of media and liberal rhetoric about "the deficit" and "the rich," but the real news is how well these lower rates have been soaking the rich to fill government coffers.
The latest evidence is Treasury's monthly budget report for May that tax receipts were up by $137 billion, or a remarkable 11.2%, for the first seven months of Fiscal 2006 through April. That's more than triple the inflation rate. And it comes on top of the $274 billion, or 14.6%, increase in federal revenues for all of Fiscal 2005, which ended last September 30.
[Tax Cut Bounty]
These columns have been documenting this trend for the last couple of years, as well as the revenue tide flowing into state budget coffers. Overall state revenues climbed by 8% in 2004 and nearly 9% in 2005, according to the Census Bureau, and more and more states are piling up big surpluses. We've reported this news because politicians like to disguise these tax windfalls so they can spend it all with impunity and still plead poverty. Journalists contribute to this ruse by focusing their budget coverage on deficits, rather than on the spending and revenue trends that are the actual components of any budget.
The current revenue rush also refutes the prevailing Washington consensus that the federal deficit is the result of the Bush tax cuts. In fact, this revenue tsunami is the direct result of the expansion that took off in earnest at about the time the 2003 tax cuts passed. Lower tax rates have since had precisely the result that supporters predicted, though don't look for that story on page one any time soon.
This explains why tax-cut opponents have tried to change the subject from the sluggish growth they first expected, to the "jobless recovery" that soon became the 4.7% unemployment rate recovery, to lagging wage growth that is also now increasing. The latest liberal themes are allegedly rising "inequality" and allegedly exorbitant executive compensation. These are subjects for other editorials, but their current political and media prominence means the critics are conceding that they can't credibly call the tax cuts an economic failure. So they have to find other election-year talking points.
This revenue wave has also come as a shock to the estimators at the Congressional Budget Office, whose May analysis is full of implicit amazement, not to say chagrin, since they predicted nothing of the sort. As recently as March, CBO was still advertising an expected increase in the baseline for individual income tax receipts of only $76 billion and merely $24 billion in corporate tax receipts for all of Fiscal 2006. Yet in only seven months, individual income tax revenues have already climbed by $56 billion and corporate receipts by $40 billion. (See nearby chart.)
"Various types of personal income not automatically subject to tax withholding may have increased faster than expected in 2005," explains CBO, in as much of a mea culpa as the bureaucrats allow themselves. "Sources of such income could include capital gains, noncorporate business income, interest, and dividends. In addition, growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers, who face the highest tax rates."
Translation: CBO completely missed that lower tax rates on income, capital gains and dividends would produce greater tax revenue. Their static-revenue calculations missed the dynamic impact that greater incentives would have on individuals to work, invest and to declare income and stock-market profits. To put it another way, they failed to see that the Bush tax cuts would do more to soak the rich, and fill the Treasury, than keeping the higher rates would have.
This also underscores the folly of letting CBO or the Joint Tax Committee or any other bureaucracy be the final arbiters of "scoring" for legislation. They're so wrong so often that Members would be better off passing laws that they believe make sense. Not fixing this tax "scoring" system is another GOP failure.
This revenue inflow also means that federal taxes as a share of the economy are now almost back to their post-World War II average of roughly 18%. That share will continue to increase if the economy continues to grow, as more taxpayers get wealthier and are thrown into higher tax brackets. The only reason the federal deficit continues to exist is because Congress continues to spend more than 20% of GDP.
So far in Fiscal 2006, spending is still rising by 7.6% overall. Defense is rising by only about 6%, but Medicare is speeding ahead at nearly 14%, thanks to the new prescription drug benefit. As ever, the real budget problem is spending, especially on entitlements. The solution there is restraint and reform, not higher taxes. At least Republicans can finally point to a policy victory this year, one that should push any big tax increase well past the next election. |
