The Associated Press has a news article and a chart illuminating the downturn in federal tax receipts, which the AP says are "on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression." There was a warning of this in a September 5, 2006 New York Sun editorial, headlined, "Progressive?" which answered calls for increasing taxes on the rich by explaining "the tax code, both at the federal level and in New York City and State, is already so 'progressive' that our governments are essentially mortgaged to the rich. It's almost a 'Hedge Fund Government,' whereby the government's revenues are increasingly dependent on stock market performance." That editorial is looking pretty astute just about now. It warned that "If the stock market were to decline sharply," the effect would be "huge government budget deficits open up." The Sun editorialists made the same points about New York state in a June 4, 2002 editorial, "Mortgaged to the Rich," which quoted E.J. McMahon of the Manhattan Institute as saying, "When the rich get a toothache in New York, the state gets a big headache." Or, as an October 28, 2002 New York Sun editorial, "Mortgaged to the Rich, Part II," put it, when New York's wealthy sneeze, the city and state budgets catch a cold.
In other words, the Associated Press misses the degree to which the progressivity of the federal tax system -- in which the top 1% of taxpayers contribute 40.4% of the total income taxes collected by the federal government -- puts the federal government at the mercy of fluctuations in the capital markets and in asset prices to which the highest earners are highly sensitive. What makes the near- and medium-term outlook for tax receipts even more troubling is that, based on the convulsions of the past year, those same high-income earners dependent on capital transactions may have sufficient harvested and unharvested tax losses to offset any imminent gains. If you want a balanced federal budget or a near-balanced one, that's bad news. As for the end-game, it could play out in several ways. The big deficit or the prospect of one could force the Obama administration to rein in some of its ambitious spending plans. We are seeing some of that play out politically now in the polling on the health care policy debate and in the resistance from some of the Blue Dog Democrats. Those concerned about the growth of government might see that outcome as a positive one. Another possible outcome is that Congress and the administration will raise taxes even more on "the rich" to try to close the deficit. The irony there is that they'll be going further down the road of "progressive," i.e. mortgaged to the rich, tax policy that got them into this pickle to begin with.