- The Washington Times - Tuesday, December 3, 2002

Recent data reveal some startling facts that in turn raise serious concerns for the nation's future fiscal course.
Counter to liberal assertions, last year's tax cuts account for just 20 percent of this year's decline in federal revenues and actually made America's tax code more progressive. Interesting in their counterintuitive nature, their real significance is even greater.
First, as the tax code has gotten more progressive, the revenues it produces become more volatile because they must be generated by an increasingly narrower base. Second, this narrow base is already shouldering a tax burden that is high by historical standards in relation to the American economy. Third, if more revenues are to be raised, it will be difficult to depend on the upper middle class and above to pay them alone.
In truth, while liberals have mortgaged themselves to the higher earners in the near term, these earners cannot produce the level of revenues needed to sustain the liberals' increasingly costly spending programs over the long-term.
To understand the serious implications of these arguments, we must first understand the facts. According to CBO's August update, total tax cut legislation accounted for only $75 billion of the $376 billion decline in this year's revenues and OMB's analysis last month said the 2001 Bush tax cut accounted for just 7 percent of the change in the overall surplus. Economic and technical factors accounted for the overwhelming remainder.
In explaining how their earlier estimates had missed the mark, CBO pointed to the rapid decline in capital gains and in the "slower growth of very high incomes in comparison to that of overall income." These two components are believed by CBO to have contributed almost half of the rapid revenue growth that had equally confounded estimators over the last several years. While stock market volatility is now familiar, it evidently has a corollary in the federal budget.
Understanding why is not hard when you understand how dependent federal revenues are on a relatively small segment of society.
Again according to Congress' estimators, the Joint Tax Committee, those making $75,000 or more will pay 72 percent and those making $100,000 or more will pay 58.7 percent of all federal taxes paid by individuals (income, employees' share of payroll, and excise taxes) once last year's tax cuts are fully implemented in 2006. Despite liberal rhetoric that only the rich benefited, these percentages increased (from 71.7 percent and 58.4 percent) as a result of last year's tax cuts in other words, America's tax code became more progressive and revenues became more dependent on the economic performance of a smaller group.
To add one final fact to the tax puzzle, it is important to remember that the nation's tax burden will remain historically high. Even in this year when revenue estimates have been reduced by a terrorism-induced recession, individual income taxes are projected to be 9.4 percent and total taxes to be 19.2 percent of total GDP in 2010 (the final year of last year's tax cut).
These levels will be higher than any post-WWII years other than 1998-2001 for individual taxes and the total tax burden will be higher than any years but 1997-2001, 1981 and 1969. Of course if last year's tax cuts aren't extended, these percentages will be even larger.
What do these tax facts tell us? That we are seeing the end-result of class warfare: A shrinking group is shouldering virtually as large a tax burden as ever been supported by the nation.
We already know existing revenues are insufficient to meet the cost of liberal spending programs that are already on the books and it is not as if liberals aren't seeking to add to these programs.
Where will the money come from? The evidence shows the pattern of foisting increasingly larger percentages of the tax burden onto a smaller group of people can't continue. At some point, the few, on which the tax system has become ever more dependent, are overly susceptible to an economic downturn or to make the calculation that additional work is not compensated by their after-tax return. The result is that if federal government spending is not controlled, then the tax burden will have to begin extending backward down the income ladder if it is to garner the necessary revenue.
Even if this is politically feasible, there is a real question as to whether it is economically so. Already taxed at an historically high rate, further increases on whomever they are levied will take the nation to unprecedented levels and put at risk the nation's economy.
This sets the stage for a vicious cycle: The economy's underperformance causes the higher income groups to suffer disproportionate drops in income, which causes a disproportionate drop in federal revenues and exacerbates shifting the tax burden down the income ladder to compensate for falling revenues and rising expenditures.
America is coming to the crossroads where liberalism's simplistic class warfare has carried it. Further demagoguery will not only not take us from this point, but will hasten us to it. The only recourse is to reverse course by understanding that the equation of increasing spending and decreasing those who pay for it is not sustainable. This false promise was recently papered-over by an economic boom that masked the long-term problem. The bills that are being so freely assigned to others are going to begin coming home soon to the rest of the nation as well.

J.T. Young is a deputy assistant secretary of the U.S. Treasury Department.


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