Keep Those Tax Checks Coming, Folks

The windfall could swell the budget surplus for some time

Nobody's happier to see the stock market setting records than Uncle Sam. Thanks to the market's relentless climb, the U.S. Treasury took in a record $1.7 trillion in 1998. That's 20.5% of gross domestic product, a postwar high, according to the Congressional Budget Office (CBO). Not surprisingly, the big surge is coming from individual taxpayers, whose rising salaries, capital gains, and bonuses resulted in $829 billion worth of taxes--a 12% jump over 1997. Corporate payments rose 3.5%.

The trend is continuing in 1999. From Jan. 1 through Mar. 10, income tax collections are up 10% over the same period last year, says economist Louis Crandall of New York consulting firm R.H. Wrightson & Associates. How come? Economists believe that the growth of special compensation--bonus checks and middle-management stock options--is the major cause of the jump. Personal tax payments exceeded the CBO's forecast by some $60 billion, accounting for the bulk of the $70 billion federal surplus in 1998. Tax revenue has been soaring, Treasury Secretary Robert E. Rubin told Congress in February, "primarily because affluent individuals have had large increases in income, in part from bonuses based on high stock prices and increased realizations of capital gains."

True, what the stock market giveth, it can taketh away. "The story can change very fast," warns Barry Bosworth, a Brookings Institution economist. Not only would the flow of taxes from investment-related income dry up, but also consumers feeling a "reverse wealth effect" would curb their buying, damping the overall economy. That would put another dent in tax collections.

Still, even if the stock market suffers a 10% correction and stays at that level, income tax receipts would not shrink right away, says Greg A. Jones, chief economist at, an Internet-based financial market advisory firm in Burlingame, Calif. It would take a long-term 20% stock market drop--a true bear market--to slow the economy enough to put projected surpluses at risk. Even then, the budget surplus would probably be safe for two additional years because even investors who got into the stock market as late as mid-1998 would show some gain. "You'd need to see not only a 20% setback, but one that is sustained--something that really digs into consumer psychology," Jones says.

As for realized capital gains, they have more than tripled, from $141 billion in 1993 to $436 billion last year, and should exceed $500 billion in '99, says Mark M. Zandi, chief economist at Regional Financial Associates Inc., an economic consulting firm in West Chester, Pa.

Still, a far bigger chunk of revenue is coming from bonuses. Corporate bonuses are not only bigger but are also being awarded to more employees. A recent survey of 397 companies by Watson Wyatt Worldwide, a compensation-consulting firm in Bethesda, Md., shows that 40% of companies award bonuses to nonexecutive employees each year. A separate June, 1998, study of 350 large companies, by William M. Mercer Cos., a human-resources outfit in New York, found that 35% of employers surveyed offer stock options to a majority of their workers. That's an increase from 30% the year before.

GOOD FORTUNE. Consider the good fortune of employees at Ford Motor Co. and IBM. On Mar. 3, Ford gave 160,000 hourly and salaried workers profit-sharing checks averaging a record $6,100, while IBM is doling out $1.6 billion in 1998 bonuses to nonexecutive employees--an all-time high.

Keep Those Tax Checks Coming, Folks

Still, the biggest payouts--and the biggest tax bills--are concentrated among CEOs and other top-level executives. The CBO says that in 1997, the last year for which it has an income breakdown, those earning $200,000 or more annually--the top 1.5% of taxpayers--paid 37% of total income taxes. That represents an increase from 30% in 1993.

For now, the CBO forecasts that the U.S. will rake in surpluses totaling $2.7 trillion over the next decade. If a roaring stock market leaves the 10,000 mark in its dust, the haul may grow even bigger. That's sure to make Uncle Sam cheer Wall Street on.

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