This.
>>>>>>>>>>
New York Times - October 20, 2000
Taxes, the Market and Luck Underlie the Budget Surplus
By LOUIS UCHITELLE
. . . Taxes thrown off by the soaring stock market contributed handsomely to the surplus. So did higher tax rates on the rich, enacted just before their incomes surged ahead of other Americans' in the booming economy of the 1990's. Cutbacks in military spending after the cold war also helped significantly. Without these three windfalls, the budget would be in deficit today. . . . "
[mbs] In order of importance, the high income surge is by far the most important. I don't believe we'd have deficits without the other two. I've never seen a report to support that notion either.
Remember the elites have an incentive to downplay the size of the surpluses, and to discount their sustainability.
" . . . The bull market and the surge in tax revenue from the rich by themselves brought the budget out of deficit. If the market had risen more slowly in the 1990's, or income had been distributed more evenly across the work force, then the current surplus of $81 billion would instead be a deficit approaching $100 billion, . . .
[mbs] Hello. Surplus of $81 billion? Surplus for FY2000 is $224 billion, projected for FY2001 is $260b or so. We've started redefining, without even so much as a warning.
" . . . according to government estimates. And if military spending had simply held steady at the 1990 level of $289.8 billion, instead of falling, then an additional $261 billion would have been subtracted over the decade from the surplus."
]mbs] He just got through saying without the defense fall-off, there would be no surplus.
" . . . The nation, in sum, would have been struggling today with an annual budget deficit of more than $300 billion, about as high as the annual deficit has ever been for federal government operations other than Social Security.
The so-called unified budget surplus, . . . "
[mbs] Oh shit. Another pod has hatched.
" . . . including Social Security, which has its own revenue stream from payroll taxes, was $232 billion in the fiscal year that ended last month. This much larger unified budget surplus is often cited in the political debate. But without the windfalls of the 1990's, it, too, would show a deficit today, one of about $200 billion."
[mbs] I don't know where he's getting these numbers. They might as well be flying out of his ass.
"We did not expect the favorable experiences that produced these surpluses," said Alan Auerbach, an economist and tax expert at the University of California. "Whether they will last is largely beyond anyone's control, including the politicians."
[mbs] This dude wrote a paper saying the Federal employees trust fund surplus (a purely paper transaction among Federal funds) should be subtracted from the cash surplus since it's for a future obligation. At the same time the present surplus is net of expenditures for Federal employee pension benefits. Looks like double-counting to me.
" . . . Vice President Al Gore and Gov. George W. Bush of Texas are counting on the good luck to last. They propose to use up - in tax cuts and new spending - nearly all of the surplus projected by the Congressional Budget Office over the next 10 years."
[mbs] Gore: no in either case, Bush, no if you define surplus as unified budget (though he trips close, depending on some of the unquantified items in his proposals).
" . . . The projections of the budget office, a nonpartisan research arm of Congress, assume that the mix of fortuitous circumstances that swung the budget from deficit to surplus will continue over the next decade, at least on the revenue side. That would happen even if the economy slowed, the budget office estimates.
"We are assuming," said Dan Crippen, director of the budget office, "that the tax revenues generated by the economy at any level of economic growth are now permanently higher than they were a few years ago."
[mbs] These are two different statements: that we will have 'continued fortuitous circumstances' and that revenues will grow at a permanently higher level. Further, the latter could be defined to include the capital gains dough, but it is not in CBO calculations. One could have noted that CBO is in denial regarding economic growth -- they still expect it to drop to a lower trendlevel and it might not. That's why the projections keep getting a multi-billion dollar bump every six months -- because reality does not follow the model. The budget hawks show some nice chutzpah by saying now, look how low the surplus estimates were; you can't trust them.
" . . . That assumption goes unchallenged by Mr. Gore and Mr. Bush - although the recent sell-off in the stock market, if it continues, could eventually undermine tax revenue. . . .
[mbs] Looks like Louie U. has been reading the nervous nellies on this list.
" The bull market delivered more than $70 billion of the nearly $180 billion in extra tax revenue, not only from a surge in capital gains taxes on the sale of stocks, but also from taxes on stock options cashed in and market-related bonuses, as well as taxes on withdrawals from pension accounts fattened in the soaring market. Some of the rise in taxes on pension withdrawals was simply taxes deferred on contributions to retirement accounts like the 401(k). Most of these accounts have existed only since the mid-1970's and are just now being drawn down in significant amounts."
The first bit is irrelevant to the point at issue. Whatever happened has happened. Whether projections incorporate some continuation is what is in question. They don't. The 401K thing goes the other way. There will be more taxable withdrawals from these in coming years, not less.
" . . . The surging economy and rising employment added another $40 billion in unexpected revenue from taxes on individual incomes, the budget office estimates. And labor productivity played a role. It surged over the last five years as workers increased their output for each hour on the job. This extra revenue from rising efficiency showed up as taxable individual income or as taxable company profits. Whether the unanticipated surge in productivity growth will last through the decade is still an open question among economists."
[mbs] same point. In fact CBO allows for a modest increase in productivity growth in projections, not at all do they assume the high levels observed recently will persist indefinitely.
" . . . The surge in taxes paid by the wealthy has been the biggest single source of the surplus, accounting for roughly $72 billion of the $421 billion swing over eight years. That has pushed total income tax collections from all Americans to nearly $900 billion annually, or about 10 percent of the gross domestic product, up from 7 percent to 8.5 percent, for most of the years since the early 1960's.
The budget office's projections on the surplus assume that taxes on individual incomes will keep this revenue above 10 percent of the gross domestic product each year of this decade. That optimistic assumption is challenged by some economists.
"If we plunge into a recession, the surplus projections are going to be way off," said William Gale, a senior fellow at the Brookings Institution, a research group. . . . "
[mbs] In fact the projections factor in the effects of a recession. So on average the onset of a recession does NOT alter the projections; it merely changes the timing of surpluses. Obviously a recession sooner has worse effect than one later.
" . . . In explaining the projections, the budget office, in a July report, attributed the unanticipated rise in individual income tax revenue in part to the increase in capital gains taxes from "surges in stock prices and growth in stock market volume." Tax receipts from the wealthy, whose incomes rose far more rapidly in the 1990's than those of most other Americans, got equal billing. . . . "
"The average effective tax rate climbed because of a swift rise in income among people in the highest tax brackets," the report said. It concluded that the stock market and the tax revenue from the wealthy "explain many of the recent changes to both actual revenues and the projections of revenues over the next few years."
Congress set the stage a decade ago for the budget surpluses appearing today. Tax rates rose for the wealthiest Americans as a result of legislation in 1990, when Governor Bush's father was president, and in 1993, under President Clinton. A 1997 law undid some of the 1993 tax rate increases, but tax rates on wealthy Americans were still sharply higher when the economy suddenly roared ahead in 1996. The boom lifted nearly everyone's taxable income, but a far larger share of the gain - in the form of stock options and bonuses as well as higher pay - went to people with taxable incomes above $200,000.
So-called bracket creep, when rising incomes put people into higher tax brackets, accounted for a significant share of the surge in tax revenue. But equally significant was the flow of income to people already paying the highest rate: up to 39 percent vs. 28 percent a decade ago. . . . "
[mbs] Exsqueeze me but bracket creep refers to the tax effects of inflationary increases in income when brackets and other items are not indexed to inflation. Much of the tax code, including brackets, exemptions, and standard deductions, are indexed now.
" . . . That was particularly the case for people reporting $1 million or more in taxable income. Their taxable income rose to $508 billion in 1998 from $171 billion in 1993, an increase of nearly 200 percent, according to Citizens for Tax Justice in Washington.
"Not since the 1920's has income been so concentrated at the top," Mr. Gale said.
But if tax revenue has grown faster than the economy itself and well above historical trends, in the view of the Congressional Budget Office, spending certainly has not. The spending restraint also fattened the surplus, but now seems in conflict with some of the stated plans of Mr. Gore and Mr. Bush."
[mbs] Meanwhile on another planet in the "illusory surplus" universe, they say spending restraint is unlikely. You can get any damn projection result you like, as long as you put your ruler on the two data points of the variable that gets you the answer you like.
"Both have spoken, for example, of maintaining a strong military. But a budget office report this month estimates that an additional $50 billion a year will have to be spent on the military to maintain the armed forces at their present level. That includes the cost of overhauling or replacing aging equipment. The $50 billion is well beyond the annual increases in military spending used by the budget office to calculate the budget surpluses over the decade."
[mbs[ Perhaps so but both parties have been content to let the mili bud shrink. Finance rules.
"Federal spending on education has also declined since 1992 as a share of the gross domestic product, although both candidates call for a stepped up federal role in education. Generally, the mild spending increases for education, the military, research and other discretionary spending are a result of the spending caps imposed in the 1990's tax laws.
"If Congress and the next administration are not going to increase these spending caps," said Robert Pollin, an economist at the University of Massachusetts, "then any growth in the economy or surge in the stock market is naturally going to translate into more tax revenue and a surplus."
[mbs] I wonder what other insights old Bob contributed to this nauseating article.