Weekend Question 2B: How Many More Great WSJ Columns Like This One Do We Need?
Question 2A is here.
__________________________
Answer — As many as it takes until the budget balances (link requires subscription; HT “S.O.B.er” RedHawk Review):
Their Income Up, U.S. Rich Yield A Tax Windfall
Surging Receipts Prompt Lower Deficit Projections, Debate Over Bush Tax CutsWASHINGTON — As America’s rich get richer, the taxes they pay on their increasing income is yielding a windfall for the U.S. Treasury.
The Bush administration and its supporters point to a recent surge in tax receipts as vindication of the 2001 and 2003 tax cuts that critics say favored the wealthy. And even opponents of the tax cuts acknowledge that the surge in unanticipated revenue is coming from the rich.
With wealthy Americans taking an increasing share of total household income and paying a greater share of total taxes, “what we’re seeing is a repeat of the late ’90s, where you get a flood of tax revenues from the hyper-rich,” said Rudolph Penner, a former Congressional Budget Office director now at the Urban Institute think tank. “It may raise some worries socially, but it certainly is good for revenue.”
The Treasury reported last week that tax receipts in April jumped 13.5% from a year earlier to $315.1 billion — much of that increase coming from taxes on investments and other sources of income more important to the wealthy. Receipts from these so-called nonwithheld taxes in April, a month when many tax returns are filed, were up about 17% from a year earlier. (Most Americans have the bulk of their taxes withheld from wages paid through the year.)
Treasury Secretary John Snow, in a speech to the Bond Market Association Friday, said: “The results are in, and they are clear: Economic growth has led to a surge of tax revenues and shrinking deficits. Despite the cries from our critics, it cannot be denied that low taxes truly are consistent with rising federal revenues, which of course help bring the deficit down.”
….. Though the Bush tax cuts mean that the best-off Americans face lower effective tax rates than under President Clinton, they do pay a bigger share of all federal taxes. Data from the CBO and projections by the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution think tanks, show that the top 10% of income earners (with incomes above $251,400) will pay 56.2% of all federal taxes this year, up from 52.2% in 2000. That includes income and payroll taxes, Social Security and the like. The growing tax take from the rich reflects their growing share of the nation’s income. In 2006, the top 10% is projected to receive 44.7% of all household cash income, up from 40.6% in 2000.
There is a BIG hole in that final sentence, which the CBO’s Penner doesn’t understand, and which the liberal critic in the article pounced on, but incorrectly (not excerpted here).
“Household cash income” is “reported” household cash income, and an upward change in the figure is not automatically a “rich getting richer” indicator. And no, I’m not saying that cheating is any more or less rampant than it has been in previous years. What I’m saying, and what experience has shown, is that when capital gains tax rates are lowered, more capital transactions take place, and hence more income (profit on those capital transactions) is reported. So in times of high capital transaction activity, of course you’ll see the share of total income reported by investors making those transactions go up.
These investors aren’t immediately better off than they were before; in fact they’re a little worse off, because of the tax they have to pay. But in the long run, the willingness to take profits in capital transactions usually means that there must be better investment opportunities elsewhere, even after the current tax is paid. The lower rates encourage people to cash in and go where the opportunity is with what remains, leading to more wealth for the investors involved, but also to higher growth for the economy as a whole. Conversely, when cap gains rates are too high, fewer transactions take place, less income is reported, and an economy with huge amounts of locked-in capital does not grow as quickly.
I say “keep the rates low, and let a billion tax-generating, economy-growing transactions bloom.”
Analysts: Bush tax cuts are swelling deficit
Link:
http://www.dfw.com/mld/dfw/14608866.htm
WASHINGTON — When President Bush signed legislation Wednesday to extend lower tax rates for capital gains and dividend income through 2010, he suggested that his tax cuts are behind a surge of new revenue into the Treasury, and he implied that it’s enough to offset the revenue lost by these reductions.
At a ceremony on the White House lawn, Bush said his tax cuts had helped the economy grow, “which means more tax revenue for the federal Treasury.â€
That’s just not true. A host of studies, some written by economists who served in the Bush administration, concluded that tax cuts mean less money for the Treasury.
The cuts Bush extended Wednesday will cost the Treasury $70 billion over five years. They may help spur economic growth, but they still lose more revenue than they generate. And unless they’re matched by lower federal spending, they worsen federal budget deficits.
Tax revenues grew by $274 billion in 2005, a 15 percent increase over the previous year; and receipts are growing this year too.
But does that mean the president’s 2001 and 2003 tax cuts generated enough additional revenue to pay for themselves?
“No,†said Douglas Holtz-Eakin. He was the chief economist for Bush’s Council of Economic Advisers in 2001 and 2002, then the director of the nonpartisan Congressional Budget Office until late last year.
Holtz-Eakin said other factors were behind the surge in tax revenues. Revenues rise as the population grows. Revenues would have risen in the post-2001 economic recovery with or without tax reductions, as they did in the ’90s.
Asked by Knight Ridder whether the tax reductions paid for themselves, Treasury Secretary John Snow acknowledged that they don’t. He also acknowledged that economic growth and stock market gains were strong in the late 1990s, when the capital-gains tax stood at 20 percent and dividend income was taxed at rates as high as 38.6 percent.
Bush and Congress cut both to 15 percent in 2003; the legislation that the president signed Wednesday extended that rate through 2010.
A Harvard University paper last December concluded that up to 50 percent of a cut in capital-gains taxes would flow back to the Treasury in new revenues. It was co-authored by N. Gregory Mankiw, who headed Bush’s Council of Economic Advisers from 2003 to 2005.
But even paybacks of 50 percent still mean a net revenue loss for the Treasury.
That doesn’t mean that economists oppose reducing taxes on capital gains and dividends. They just want them to be balanced so they don’t worsen budget deficits.
The federal budget held a $236 billion surplus in fiscal 2000. After Bush’s 2001 and 2003 tax reductions, it went into annual deficits, peaking at $412 billion in fiscal 2004.
Comment by Theo — May 20, 2006 @ 3:47 pm
Theo, I’ll take John Snow inside quotation marks vs. John Snow outside of quotation marks.
Here is how I see the two “acknowledgments” conveniently not placed into quotes by the KR reporter:
— The truth is that tax cuts dont “just” pay for themselves, they MORE THAN pay for themselves. The tense of the sentence in the KR report is weird — “Asked by Knight Ridder whether the tax reductions paid for themselves, Treasury Secretary John Snow acknowledged that they don’t.” You would have expected to say the “didn’t,” not “don’t.” That tells me they were on another topic, or another kind of tax cut. For the record, the ordinary income-only tax cut of 2001 didn’t pay for itself, because it didn’t shave enough off the top end to change behavior much, and it didn’t do anything for cap gains or dividends.
— Econ growth and stock gains were strong in the late 1990s because the cap gains rate was cut to 20% from something higher in 1997. See blogbud Don Luskin for more on that.
See? Now everything’s consistent, despite KR’s attempts to make it seem otherwise.
The surplus figure cited is not consistent with the annual growth in the national debt cited here, where the national debt went up $18 bil in FY 2000:
http://www.publicdebt.treas.gov/opd/opdpdodt.htm#years
I think there’s a reason, but I would have to investigate to see if my hunch is right. And even if there WAS a surplus, it was largely driven by the cap gains cut in 1997 (NOT the Clinton 1993 tax increases) and massive redemptions of stock options, as those holding them saw the stock market crumbling before their very eyes and saw the need to cash in ASAP.
Comment by TBlumer — May 20, 2006 @ 3:56 pm
Even the WSJ article will not say the tax cuts “pay for themselves”, because they don’t, by a longshot.
Snow admits to as much in the above article.
The aristocracy buys a lot more stuff for themselves, a pittance of which “trickles down” to the peasants.
Why do it that way? Why not immediate tax relief for everyone else?
Because they don’t fund election campaigns, that’s why.
Taxes from revenues shot way up during the Clinton years, too. And nary a tax cut for the rich made it happen.
Comment by Theo — May 20, 2006 @ 4:08 pm
#3, oh, so because the words “pay for themselves” don’t appear, that means they must not believe it.
I don’t have time to belabor the obvious.
Go here:
http://www.investors.com/editorial/IBDArticles.asp?artsec=20&artnum=1&issue=20060518
From the IBD post referred at the Question 2A post (but not excerpted; I’m remedying that with Update 1 there):
According to Congressional Budget Office data, the reduction in the cap-gains rate to 15% was expected to cost the federal government some $27 billion in revenues. But it didn’t happen that way.
In fact, as [Trend] Macrolytics’ Donald Luskin recently pointed out, the tax cuts ended up bringing in $26 billion in added revenues — exactly the opposite of what was predicted.
That’s a $53 billion swing from minus 27 to plus 26. If that isn’t “paying for itself,” what the bleep is?
The only fallback is “it would have happened anyway.” Please, if that were the case, why didn’t any of these genius Monday morning quarterbacks predict swelling revenues at the time?
Comment by TBlumer — May 20, 2006 @ 4:53 pm
LOL - what did you think the WSJ and IBW would say?
That the tax cuts are bad?
You and they are connecting dots, trying to make a complete picture that isn’t there.
As you rapturously love your President to say, “history will decide”.
Comment by Theo — May 21, 2006 @ 12:18 am
Once again, a non-responsive remark.
Don’t come back to this post without an answer to:
That’s a $53 billion swing from minus 27 to plus 26. If that isn’t “paying for itself,†what the bleep is?
Comment by TBlumer — May 21, 2006 @ 12:24 am
Why do it that way? Why not immediate tax relief for everyone else?
I’m paying a lower rate, and that’s nice. I’d like to pay a still-lower rate.
Theo: If you feel like you aren’t paying enough, please feel obliged to leave a tip on your next return.
Best,
Erik
Comment by eLarson — May 21, 2006 @ 2:51 pm