NCPA - National Center for Policy Analysis

Why Tax Cuts Are Less Popular

November 30, 1999

People think their taxes are too high, and a majority support tax cuts and tax reform, but polls show cutting taxes is well down the list of voters' priorities. This is puzzling because taxes as a share of gross domestic product (GDP) or personal income are at all-time highs and have risen sharply during the Clinton administration.

One reason voters are less concerned may have to do with the rapid increase in net household worth. For most people, increases in wealth appear as more income. This is especially the case as pensions have been converted from defined-benefit to defined-contribution plans, such as 401(k)s and Individual Retirement Accounts (IRAs).

Therefore, it may be more appropriate to look at taxes not just as a share of GDP, but as a share of GDP plus the increase in net worth over the previous year.

  • Taxes as a share of GDP plus the year-to-year change in household net worth have fallen from 18.3 percent in 1990 to 15.1 percent in 1998.
  • This is due mainly to the fact that net worth increased $3.7 trillion last year, 43 percent of GDP, but only $431 billion in 1990, less than 8 percent of GDP.

Taxes rise more slowly than net worth, but if net worth drops, the effective tax burden will rise sharply, which is what happened in 1994.

Budget surpluses may also reduce the demand for tax cuts, if people view deficits as deferred taxes and budget surpluses as de facto tax cuts. That may also explain why the notion of paying down the national debt is popular.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), "The Trouble with Tax Cuts," Policy Review, December-January 2000, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.

 

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