NCPA - National Center for Policy Analysis


April 6, 2007

Under the cover of zero media attention, Congressional Democrats are constructing a budget process that will make a tax increase all but inevitable, says the Wall Street Journal.

The ploy here is pay-as-you-go, or "paygo," budget rules that would require offsets of tax cuts with either cuts in entitlement spending or with other tax increases, says the Journal.  Entitlement rules already in place don't count under paygo rules, so programs like Medicare and Medicaid will keep growing on autopilot.  So-called discretionary spending -- defense, education, highways, etc. -- isn't affected at all.

This is a big enough political con, but an even bigger ruse is the Democratic-media chorus that the Bush tax cuts must be repealed because they've left the Treasury high and dry, says the Journal:

  • Tax receipts did plunge earlier this decade from their late-1990s heights, reaching a trough in fiscal 2004 of 16.3 percent of gross domestic product (GDP), while the economy was still recovering from the collapse of business investment and the stock market bubble.
  • But the lower rates also provided incentives that led to a rebound in investment, stock prices and ultimately in economic growth, individual incomes and corporate profits.
  • This produced, in turn, a very sharp rebound in federal tax receipts -- to 17.6 percent of GDP in fiscal 2005 and 18.4 percent in 2006.

Further, if the tax cuts are allowed to expire:

  • The government will grab more than 1.5 percent of GDP a year in extra tax revenue by 2017, according to the Congressional Budget Office. 
  • At 20.1 percent in that year, taxes as a share of the economy would exceed every postwar year except for the 20.9 percent of 2000, when the stock bubble and bonuses tossed many taxpayers into higher tax brackets.

Source: Editorial, "The Coming Tax Increase," Wall Street Journal, April 5, 2007.

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