In Case You Missed It …. The Wall Street Journal Editorial: Conrad’s Tax *

WSJ Editorial
Conrad’s Tax *
March 20, 2007

Amid the hubbub about U.S. attorneys last week, few people noticed the big Beltway economic news: Senator Kent Conrad and his fellow Democrats proposed their five-year budget outline, or at least that part of it they're willing to discuss in public.

Mr. Conrad, the Senate Budget Chairman, pulled off the neat magic trick of claiming his budget includes "no tax increase," even as it anticipates repeal of the Bush tax cuts after 2010. How does he pull that rabbit out of his hat? By positing what amounts to a giant asterisk where the tax increase is supposed to go and hoping no one will notice.

Mr. Conrad has no intention of extending the Bush tax cuts, which he voted against and whose repeal would slap the economy in 2011 with the largest tax increase in U.S. history. But Senate Democrats don't want anyone to know this, at least not before the 2008 election. (Emphasis added) So Mr. Conrad says his budget revenue estimates "assume that Congress will take steps to counter the effects of the expiration of tax cuts in 2010 in a manner that does not add to the nation's debt burden." How so? Well, "this additional revenue can be achieved without raising taxes by closing the tax gap, shutting down illegal tax shelters, addressing tax havens, and simplifying the tax code," he avers.

What the Senator should have said is "Abracadabra." The 10-year revenue increase from repealing the Bush tax cuts is something like $2 trillion, according to Congress's static-revenue models. Mr. Conrad is claiming that Congress will make up for all of that lost revenue by chasing down such illusions as the "tax gap," which the IRS claims is the difference between the taxes people owe and what they pay.

But if this magical $345 billion a year (as of 2001) were easily found, don't you think the army of IRS auditors and tax collectors would have found it by now? The only way to close this "tax gap" is by harassing taxpayers or closing loopholes in ways that are sure to meet political resistance and perhaps result in a backlash. Congress will never do it.

All of this is really sleight-of-hand to disguise that Democrats are intent on repealing the Bush tax cuts. This would raise the tax on capital gains to 20% from 15%, more than double the tax rate on dividends to 39.6% from 15%, and sharply increase marginal tax rates at all levels of income. (Emphasis added) And all of this saber-rattling about a future tax increase is coming just when the current expansion may need another tax cut to keep growth going. Investors are worried about subprime credit problems and the Federal Reserve, but this looming tax increase on capital isn't helping confidence. The market fell 200 points on the day Mr. Conrad unveiled his magic act last week.

As Mr. Conrad knows but also won't admit, federal revenues have returned to their historic norm as a share of the economy despite the 2001 and 2003 tax cuts. Or perhaps we should say because of them. Tax revenues have climbed by some $608 billion since the start of fiscal 2005 alone. They are now about 18.5% of GDP. (Emphasis added)

Last week the IRS released new data showing that capital gains realizations surged by 153.5% from 2003 to 2005, even with the lower capital gains tax rate. Meanwhile, dividend income rose by a little under 50% from 2002-2005.

Some of this is due to the stock market gains in the wake of the 2003 tax cuts, but incentive effects also seem to have played a role. Washington tax analyst Dan Clifton has crunched the numbers and found that from 1997 to 1999 dividend income rose only 27%, even though the stock market climbed faster than it did from 2003-2005. Several economic studies have shown that the lower 15% dividend rate inspired companies to pay more dividends; the feds get 15% of those increased dividend payouts, instead of 39.6% of nothing.

Meanwhile, the budget deficit has steadily been falling. In the first five months of fiscal 2007, federal spending has slowed to a 2% growth rate, while revenues have climbed by 9.3% and individual tax receipts have jumped by nearly 13%. On this trend, the Congressional Budget Office says the budget deficit will decline to 1.6% of GDP this year, and will keep falling if economic growth continues. (Emphasis added)

By the way, the latest IRS data also show that the wealthiest Americans continue to carry a record share of the income tax load. As the nearby chart shows, the richest 1% paid 35.6% of all income taxes in 2004, the most recent year in which data are available. The top 10% pay a remarkable two-thirds of all income taxes. The irony is that the Bush tax cuts have made the U.S. income tax code more progressive. But according to John Edwards and other class warriors, that's not enough.

If there is a virtue in Senator Conrad's magic budget act, it is that it begins to reveal where Democrats would take fiscal policy after 2008 if they run the entire government. Voters may want to look behind the Conrad curtain before their lower tax rates and higher stock-market returns go "poof." (Emphasis added)

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