Ever since the income tax was started, there have been steady changes in who pays the bulk of the taxes the government needs for spending. This year it looks like the rich and corporations are paying more taxes because they are the only ones making more money.

Of course our deficits are still insanely high, the federal government is spending more than ever before in history, and I find it highly questionable that the "rich" are making more money because they are "working harder."

As Bigger Piece of Economic Pie Shifts To Wealthiest, U.S. Deficit Heads Downward

By GREG IP and DEBORAH SOLOMON

July 17, 2006

In announcing a big drop in its estimate of this year's federal budget deficit, the Bush administration was quick to credit itself.

But this explanation falls short. While tax revenue is growing far faster than the Bush administration forecast in its budget projections in February, the nation's economy isn't.

What has changed isn't the size of the economy, but how the economic pie is divided. The share of national income going to corporations and the wealthiest individuals, already large, has expanded, while the share going to typical wage earners has shrunk. Because corporations and the wealthy generally pay income tax at higher rates than does the typical wage earner, that shift benefits the federal Treasury.

U.S. tax revenue for fiscal 2006, which ends Sept. 30, is expected to be 5% -- or $115 billion -- higher, than the administration projected in February. Largely as a result, the budget deficit is expected to be $296 billion this year, instead of $423 billion.

But total economic output is expected to be just 1% larger, before adjusting for inflation, than the White House predicted. After adjusting for inflation, it is projected to be just 0.1% larger. While the unemployment rate is lower than the administration had expected, payroll growth has been slower.

The administration has raised its estimate of corporate profits this year by 11%, but trimmed its estimate of wage and salary income by 1%. As a result, expected corporate tax collections have been revised up 20% from February. Individual income taxes were revised up 7%, with the increase primarily from wealthier taxpayers. Payroll taxes -- for Social Security, levied only on the first $94,200 of wage income, and Medicare -- are expected to total 1% less than expected.

So, the tax windfall is another piece of evidence that income inequality in the U.S. continues to grow, which in turn may explain why the average American still gives President Bush low marks on the economy despite its overall strength.

On the other hand, it also may be evidence that Mr. Bush's tax cuts are working as advertised. Lower tax rates were meant to encourage people to work more, and because their taxes were cut the most, relative to income, the wealthiest may have the biggest incentive to work and earn more.

In addition, cuts in taxes on capital gains and dividends were meant to reduce the cost of capital and encourage companies to invest more, which should lead to higher profits. This is called the supply-side effect, because it means workers and businesses are encouraged to supply more goods and services.