budget assumptions

[Doug Henwood]

Rakesh Bhandari wrote:

>Max,
>
>Why do you ignore the big story? The budget surplus is an artefact of the
>stock market bubble (high marginal tax rates hit the rentier class cashing
>in massive capital gains). Louis Uchitelle showed that sometime this year
>in a NYT Sunday piece; it came out around the same time as Davidson and
>Galbraith's editorial in the WSJ.

I just talked to some Congressional Budget Office people, who say 
that capital gains realizations in tax year 1998 (the one whose 1040s 
were due on Apr 15 1999) were probably around $418 billion, or just 
under 5% of GDP. This is a hair under twice long-term averages. They 
brought in $83 billion in revenues, a lot more than the 1998 surplus 
of $69 billion (which I see the administration is now calling the 
Reserve Pending Social Security and Medicare Reform; they give the 
surplus proper as $0). They estimate a similar number for this year. 
But of course cap gains receipts rarely go to zero, so it'd be wrong 
to say the whole surplus would vanish without rentiers' cap gains. 
But half - which is what the take would be at more normal rates of CG 
realization - is still a lot.

And the bull market is probably responsible for more than half. Wall 
Street salaries and bonuses aren't small, and consumption and 
investment spending encouraged by bull market optimism generate 
income that also results in tax receipts. (One area that doesn't 
contribute, the CBO guy told me [his name is a state secret - I'm not 
supposed to quote him by name], is stock options, since those appear 
as wage and salary expenses on employers' tax returns, so they result 
in lower corporate taxes in almost offsetting amounts.) But it looks 
like a lot of the surplus would disappear if the bull market did.