But last year Congress enacted a tax cut. How can revenues be soaring? Part of the answer is the effect of lower tax rates on capital gains. Capital gains receipts have nearly doubled since 1995. No surprise here: over the past 40 years, every time Congress has cut the capital gains tax rate, tax collections on capital gains have risen. Cutting that tax remains the one tried and true method of soaking the rich.
But there’s another more important explanation for record tax collections this year: American workers are suffering from “real income bracket creep.” Real income bracket creep is a natural result of the graduated income tax. Graduated income tax rates mean that in a time of economic growth — like the one we’re experiencing today — Americans’ higher incomes push them into higher tax brackets. Income gains in the past five years have pushed millions of middle‐income families out of the 15 percent marginal tax bracket into the 28 percent bracket. Hundreds of thousands of others have been pushed from the 28 percent bracket into the 31 and 36 percent brackets, and so on.
Bracket creep is economically destructive and morally disastrous. One of its consequences is that, during economic expansions, the government’s fiscal intake rises faster than the family’s. In the past three years, federal income tax receipts rose at almost twice the pace of wages and salaries. For example, this year income is up a respectable 6 percent, but tax receipts are up 11 percent. This exacerbates what House Majority Leader Dick Armey has called the “middle class squeeze.”
What is the effect of real bracket creep over time? Today, federal taxes are more than 20.2 percent of gross domestic product — the highest burden since the end of World War II. On the margin, the yearly change in individual tax receipts as a share of the change in personal income (less transfer payments) has reached an extraordinary 38 percent. This is the real effective tax burden on middle‐income working Americans. Thirty‐eight percent is way, way too high.