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LinkedInCredit should be given where credit is due. I have a few quibbles with the lead of Andrews’ article. Even if it sets up a compare and contrast, I never like anything that starts with “It was enough to make a supply-side, tax-cutting Republican beam with pride.” But Andrews’ conclusion is absolutely right.
But the real news is not that tax revenues are particularly high; they are not. The big change is that tax revenues have become more of a crapshoot — more volatile, more unpredictable and more buffeted by swings in the stock market than they were 10 years ago.
Why? Because tax revenues are increasingly dependent on the fortunes of the very rich.
And it turns out that the rich are different from most other taxpayers. Much more of their income is tied, not to wages and salaries, but to the stock market and to executive bonuses, which can swing widely from year to year.
Andrews’ graph brilliantly shows how the errors in the government’s revenue forecast have been increasing, with stronger than expected revenue growth in good times and worse than expected performance in bad times. Plot this against the stock market (and perhaps an index of returns on various bond market strategies of hedge funds) and I think it becomes fairly clear that the performance of the market, not just the performance of the economy, increasingly drives tax revenues.
In today’s Wall Street Journal Ip and Solomon nicely describe the political debate that has developed over the recent surge in revenues. Is it evidence that supply side incentives work, and that the rich are working harder? Or evidence that marginal tax rates for the well-to-do remain high enough to keep the tax code progressive, and thus the US government still benefits when changes in the domestic and global economy allow the already well-to-do to capture the lion’s share of the fruits of the expansion? In the first case, marginal tax rates for the well-to-do need to be cut further to induce more work and more growth and more tax revenues; in the second, case, cutting marginal tax rates on those getting all the gains from the expansion just means much lower revenues …
You know which side of that debate I am on. And where DeLong stands on press coverage of budget debates.
Very interesting. Taking it one step further, perhaps it would be useful to have all positive-revenue surprises put under lock and key — force them to go toward debt reduction/lower issuance. If I recall well, such an automatic stabilizer is part of Turkey’s agreement with the IMF. Of course, it would require some punishment for governments bent on spending programs supported by unreasonable revenue projections (that is really something that should be enforced by the market through higher yields). Still, I suppose that such a system would raise the transparency of fiscal policy.
US adopting IMF style commitments not to spend … never …
but tis true that revenue surprises recently haven’t prompted a huge round of new programs so much as reduced the deficits associated with costly now somewhat old programs (invading iraq, prescription drugs, tax cuts).
Yes, federal revenues are being driven more and more by capital income growth, as the rich and super rich have U.S. tax policy in their back pockets. Game-Set-Match.
So, we’re down to capital income growth.
Casino government.
Here in Hong Kong, 82.4% of the people don’t pay any salaries (income) tax, and 3,000 companies (1.5%) pay 80% of the profits tax.
Guess what? Wild revenue volatility!
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How do you forecast revenues from income earned in the capital markets when most standard economic models would suggest higher corporate profits and faster growth would lead to higher stock prices and higher dividends and therefore more personal income from those sources when Citigroup and GE this week reported healthy growth and operating profits and their share prices dropped markedly? In essence in such an environment predicting future tax receipts based on income earned from the capital markets becomes even harder to predict than the stock market itself? Good luck!