When Taxes Spell Good News

A strong economy boosts revenues

Taxes, as the saying goes, may be as unavoidable as death, but do they have to be so high?

That's the question raised by some supply-side economists who are exercised by what they regard as an alarming statistic: In recent years, federal individual income and payroll taxes have been claiming an ever larger share of personal income--rising from 17.1% in 1992 to 20.4% in the third quarter of '98, the highest level in the postwar period.

As some critics see it, this growing tax bite is squeezing consumers. With more income being siphoned off by taxes, they say, struggling households have had to dip into savings simply to maintain consumption patterns. And the fact that the monthly savings rate recently turned negative for the first time in 60 years underscores the problem.

Does it? Economist Paul L. Kasriel of Northern Trust Co., who has long favored lower marginal tax rates, is dubious. For one thing, he regards the picture of tax-beleaguered households struggling just to maintain consumption as highly exaggerated. In actuality, he notes, people have been spending with exuberance--so much so that consumption outlays have averaged 81.4% of personal income since the start of 1993--the highest level in four decades.

As for the rising tax take, Kasriel claims that the main cause has been increases in inflation-adjusted income, which have been pushing tax filers into higher marginal brackets. Indeed, real personal income last autumn was running nearly 4% over its year-earlier level, compared with a mere 1% gain that was registered in early 1993.

Similarly, more income has become subject to taxation as more households have moved off welfare rolls and onto payrolls in response to welfare reform and a tight labor market. Kasriel calculates that welfare payments--which are not subject to taxation--have fallen from about 0.45% of personal income in early 1992, to 0.24% at last count.

Finally, Kasriel points to a development others have cited in explaining the falling savings rate and rising tax bite: the huge increase in household net worth generated by the stock market boom. With the value of their past savings and investments rising so rapidly, consumers have felt free to curtail current savings so they can enjoy the fruits of their past thrift now. At the same time, the tax take from capital gains on stock holdings has surged higher, even though such gains themselves aren't counted as personal income.

In sum, rather than a threat, today's high tax receipts and low savings rate appear to reflect highly favorable economic trends: rising real incomes, declining welfare rolls, and increasing household wealth and capital gains.

"At the start of the Reagan Presidency," says Kasriel, "supply-siders promised us higher tax revenues if tax rates were cut. With marginal rates down sharply since then, the irony is that the current revenue surge could be the legacy of Reagan's supply-side revolution."

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