Where’s the Tax Revolt?

Reporters and Republicans are united in asking the question: Why don’t Americans demand a tax cut?

Nearly every day, economists at the Tax Foundation are asked this question. With the tax burden rising year after year, the question has taken on an almost metaphysical dimension, not unlike the title of that popular book, “Why Do Bad Things Happen to Good People?”

This year’s increase in Tax Freedom Day to May 11th underscores the paradox. Tax Freedom Day has now risen for seven consecutive years. For 26 years between 1969 and 1994, Tax Freedom Day varied in a fairly narrow range between April 28 and May 4. It is now 7 days above its previous cyclical peak. The source of the increase remains the same as it was last year and the year before: the combination of a growing economy and a progressive federal personal income tax. Even the 1997 tax cut bill barely slowed its rise.

Nor is the increase in the tax burden as measured by Tax Freedom Day anomalous. An alternative presentation, the per capita tax burden, shows a similar pattern. It rose to $9,939 in 1998, an increase of $1,679 in real terms since 1990.

Common government statistics give the same result. For example, taxes as a share of Gross Domestic Product rose to 20.7 percent. This was the second highest ever, exceeded only in 1944 at the height of World War II spending.

The good news associated with this soaring tax burden is the demise of the Federal budget deficit. Revenues have accelerated faster than the Congress and the President have been able to spend them. Revenues have grown so fast, in fact, that huge surpluses are projected for the next ten years or longer.

To be sure, millions of Americans may be clamoring for a tax cut, but the vast bulk of the body politic seems disinterested. The story goes that in the days when Wilbur Mills ran the powerful House Ways and Means Committee his Chief of Staff would come up to the Chairman whenever the tax burden started pushing 20 percent of GDP and tell him it’s time for a tax cut. Conventional wisdom had it that tax compliance would plummet, taxpayer resistance would erupt, and the economy would falter whenever taxes got above that magic figure. What has changed?

No doubt much has changed. One change may simply be that wages are rising steadily and strongly and so taxpayers don’t feel overtaxed. A worker with $20,000 in after-tax income is more interested in a $1,000 wage hike than he is in a $500 tax credit. As long as their wages and standards of living are rising, taxpayers are unlikely to bridle much at a higher tax bill.

Another factor is the evolution of the income tax. Through the reforms of past years the federal personal income tax has become a true class tax. Low-income workers are likely to be subject to a negative income tax through various refundable tax credits. Middle-income workers are likely to pay little income tax and what they do pay is at a marginal rate of 15 percent. In contrast, the top 5 percent of taxpayers by income are paying over half the total income tax burden. Thus many lower-income taxpayers probably don’t feel the pinch of the higher tax bite, and many qualify for the newly effective per child tax credit.

Also, while the top income earners bear most of the income tax, government statistics suggest they also have tended to earn proportionately more of the income increases in recent years. Thus, even though they face a marginal tax rate approaching 40 percent, their incomes may well be rising fast enough to guarantee a satisfactory year-to-year increase in living standards. Thus they, too, may not be overly exercised about their rising tax burden.

The huge increase in the stock market may also play a role here. Even while incomes have been rising, middle- and upper-income taxpayers–the folks paying the bulk of the heavy income tax burden–have also been receiving the bulk of the wealth appreciation. This may further deaden any natural tax revolt zeal.

Fiscal prudence may also play a role. For example, while economists may confidently predict large budget surpluses for years to come, taxpayers can be excused for having their doubts. And most taxpayers probably strongly prefer budget surpluses to deficits, so they are loath to risk having the government drop back into deficits due to a tax cut right now.

Tax cuts are part and parcel of the political debate, and President Clinton’s influence cannot be denied. He has effectively and appropriately elevated saving Social Security and Medicare to national priorities. These two critical programs are projected to go bankrupt. Unless something better comes along to replace them, most taxpayers probably want to see these programs sustained. The President has argued that Social Security and Medicare must be saved before we can consider tax cuts. This seems to strike the American people as a reasonable proposition.

While elevating the issues, the President’s lack of serious proposals to address them is inexcusable. It is also calculated. Lacking leadership in the form of specific proposals from the President, Members of Congress are worried about putting forth their own ideas in any detail. Without proposals they can price out to save Social Security and Medicare, Republicans have been unable to argue effectively that there would be money left over for income tax cuts.

Americans have become accustomed to a strong economy. The last recession is now eight years past. As long as the economy continues strong, many changes may be needed before a rising tax burden triggers a tax revolt. If the economy starts to choke, however, taxpayers may quickly shift their attention to the government’s share of their income. When that happens they may again discover their tax revolt roots.