NCPA - National Center for Policy Analysis

Plunging Stocks Won't Affect Surpluses -- For Now

August 30, 1998

Strong economic growth and soaring capital gains in stocks helped move the federal budget from red to black. So will market losses lead to lower tax receipts and imperil budget surpluses? Not likely, according to a wide range of economic opinion.

  • Investors who have cashed in stock winnings will swell the surplus even further, at least for the time being, experts predict.
  • Economist Lawrence Kudlow, of American Scandia Life Assurance, sees the correction having little measurable impact on economic growth.
  • Robert D. Reischauer, former Congressional Budget Office head, says the government will probably enjoy a temporary, modest rise in taxes from capital gains -- but the amount would be difficult to quantify without knowing whether small investors with years of profits built up will be selling or professionals with recently established losing positions will be bailing out.
  • John H. Makin, a budget specialist at the American Enterprise Institute, estimates that the current wave of selling would bring the Treasury no more than an extra $10 billion in taxes for the year -- and that the market's condition would have to worsen to justify worry over revenue shortfalls.

Source: Robert D. Hershey Jr., "Stock Market Retreat Not Expected to Spoil Budget Surplus," New York Times, August 30, 1998.


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