Credit should be given where credit is due. I have a few quibbles with the lead of Andrews’ article. Even if it sets up a compare and contrast, I never like anything that starts with “It was enough to make a supply-side, tax-cutting Republican beam with pride.” But Andrews’ conclusion is absolutely right.
But the real news is not that tax revenues are particularly high; they are not. The big change is that tax revenues have become more of a crapshoot — more volatile, more unpredictable and more buffeted by swings in the stock market than they were 10 years ago.
Why? Because tax revenues are increasingly dependent on the fortunes of the very rich.
And it turns out that the rich are different from most other taxpayers. Much more of their income is tied, not to wages and salaries, but to the stock market and to executive bonuses, which can swing widely from year to year.
Andrews’ graph brilliantly shows how the errors in the government’s revenue forecast have been increasing, with stronger than expected revenue growth in good times and worse than expected performance in bad times. Plot this against the stock market (and perhaps an index of returns on various bond market strategies of hedge funds) and I think it becomes fairly clear that the performance of the market, not just the performance of the economy, increasingly drives tax revenues.
In today’s Wall Street Journal Ip and Solomon nicely describe the political debate that has developed over the recent surge in revenues. Is it evidence that supply side incentives work, and that the rich are working harder? Or evidence that marginal tax rates for the well-to-do remain high enough to keep the tax code progressive, and thus the US government still benefits when changes in the domestic and global economy allow the already well-to-do to capture the lion’s share of the fruits of the expansion? In the first case, marginal tax rates for the well-to-do need to be cut further to induce more work and more growth and more tax revenues; in the second, case, cutting marginal tax rates on those getting all the gains from the expansion just means much lower revenues ...