NCPA - National Center for Policy Analysis

Why Tax Cuts Are A Hard Sell

October 7, 1999

The apparent collapse of the tax revolt in the 1990s, culminating in the Republicans' recent cave-in to President Clinton's veto of their minuscule tax bill, is a key reason for Congress's failure to shrink the size of government.

Why has the tax issue fizzled?

  • During the Clinton administration, federal receipts as a share of gross domestic product have rocketed to 21.7 percent -- the highest level in war or peace -- compared to a 1945 to 1992 average of 18.6 percent of GDP.
  • However, the tax burden of most Americans has actually fallen -- according to the broader way people think of their incomes, as wages, dividends and the overall change in their net worth.
  • Net worth rose by $3.7 trillion last year, or 43 percent of GDP, but rose only $431 billion in 1990, or less than 8 percent of GDP.

Because much of net worth is held in forms not subject to annual income taxes -- pension funds, unrealized capital gains, home equity and so forth, taxes rise more slowly than net worth. By contrast, because of progressivity, taxes rise faster than conventionally measured income (wages and dividends).

That explains why there is less interest in tax cuts right now. But if a longer downturn in the stock market causes net worth to fall, the tax burden will rise. And there will be renewed interest in tax reduction.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), "Why Tax Cuts Aren't Selling," Wall Street Journal, October 7, 1999.


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