Don't be surprised if later this year the Congressional Budget Office (CBO) and the White House sharply raise their projections of future budget surpluses--perhaps by $1 trillion or more over the next 10 years, not even counting Social Security funds. Such good news, if it occurs, will cheer Republican tax cutters, especially George W. Bush, who are struggling to find the money to pay for the huge upper-income tax cuts they want. It will also encourage Democrats who want to invest more in public programs to improve education, health insurance coverage, and so forth.
Nobody should get too excited just yet, however. Even if the budget outlook does get rosier, almost all of the projected improvement will be after 2003, and three-fifths will probably be after 2006.
Predicting surpluses that far in advance is a delicate task. The projections can be very sensitive to small changes in assumptions. The CBO's current 10-year surplus projections, for example, assume annual revenue growth of 4.2 percent. That's about a quarter-percent less than the CBO's projected growth rate for the gross domestic product, and a big drop-off from the 7.5 percent annual revenue growth over the past five years. Boost that revenue growth projection by half a percentage point, and the 10-year surplus jumps by $1 trillion. Of course, if the current revenue growth projection is half a percent too high, then there'll be a trillion-dollar swing in the other direction.
To be sure, there are plausible reasons for the official estimators to think their revenue projections are now on the low side. For example, the CBO may be reassessing its prediction that capital gains taxes will decline by almost half as a share of total income taxes over the next 10 years. If instead capital gains taxes keep up with the economy, revenue growth will be about 0.2 percent higher than currently projected. Economic growth projections and, consequently, revenues may need to be boosted a bit in light of the economy's strong performance in the past two quarters.
On the other hand, current revenue projections rely on some highly questionable assumptions about future tax policy. For example, it's assumed that by 2010, revenues from the individual Alternative Minimum Tax will jump from about $4 billion a year to $25 billion, and that the number of people paying the minimum tax will skyrocket from about a mil-lion to 11 million. This assumption reflects the fact that the minimum tax is not indexed for inflation, but everyone agrees that the problem will somehow be fixed long before the minimum tax starts affecting so many people. Current revenue projections also implausibly assume that a number of "temporary" corporate tax breaks that have been routinely extended in the past will be allowed to expire.
When I started writing this column, my intent was to make a case for how an improved revenue outlook could help grease the wheels for major, progressive tax reform. The theory is that it's a lot easier to close loopholes and make the tax system simpler and fairer when we can cushion the blow to the losers by having an overall tax cut. I even began to put together a tentative list of some changes that tax reform might entail, such as marriage penalty relief that doesn't undermine progressivity, corporate and capital gains tax reforms, boosting the standard deduction, and payroll tax cuts through an income tax credit.
But while I do think that a progressive tax reform program is an idea liberals should start thinking about--if only to avoid ceding the tax cut issue to the right--I've gotten cold feet about pushing the idea just yet. With all the uncertainty about official budget surplus projections, the best advice I can offer--to would-be tax cutters, spenders, and reformers alike--is to wait until we actually start seeing the money.
In Arizona there's a new ballot initiative to repeal the state's personal and corporate income taxes. Of course, that's a hopelessly regressive proposal. Interestingly, the tax plan is being promoted by the same people who successfully pushed for legalization of medical marijuana. Who would have thought they'd be railing about high taxes?
He Said It
From Newsweek (1/24/00):
Newsweek: Teddy Roosevelt grew a lot in office, changed his views and advocated the first inheritance tax. He thought it was wrong to have huge family for-tunes that were passed down intact. You would eliminate his tax entirely.
George W. Bush: The irony of the unintended consequences of the inheritance law was, it kept the fortunes intact. Because of the inheritance law, people went to great lengths to have trusts and foundations and skipping generations and skipping instruments that bound up all this wealth so it never got redistributed. That's one of the ironies of the inheritance [tax].
Newsweek: But how would it have been redistributed if there were no inheritance tax?
Bush: Because generations who don't have to work would blow their inheritance. I believe that, I'm not kidding you.
--Robert S. McIntyre