Freedom's Fidelity

Thursday, June 15, 2006

The Effect of Cuts

A few years ago I wrote a post about the laffer curve and how tax cuts can actually increase government revenue. Of course, back then, Bush's tax cuts were touted as a scheme that would 'benefit the rich' (which is just silly) while only driving us deeper into the black hole of national debt.

Seems, as I suggested, that the opposite is taking place:

Aided by surging tax receipts, President Bush may make good on his pledge to cut the deficit in half in 2006 - three years early.
Tax revenues are running $176 billion, or 12.9%, over last year, the Treasury Department said Monday. The Congressional Budget Office said receipts have risen faster over the first eight months of fiscal '06 than in any other such period over the past 25 years - except for last year's 15.5% jump.

The 2006 deficit through May was $227 billion, down from $273 billion at this time last year. Spending is up $130 billion, or 7.9%.

The CBO forecast in May that the 2006 deficit could fall as low as $300 billion. Michael Englund, chief economist of Action Economics, has long expected a deficit of about $270 billion this year. Now he thinks there's a chance the "remarkable strength in receipts" will push the deficit even lower.

With the economy topping $13 trillion this year, a $270 billion deficit would equal less than 2.1% of GDP, easily beating the president's 2.25% goal. Bush made his vow when the White House had a dour 2004 deficit forecast of 4.5% of GDP, or $521 billion. The actual '04 deficit came in at $412 billion, or 3.5% of GDP, before falling to $318 billion, or 2.6% of GDP, in 2005.

A CBO analysis last week noted that withheld individual income and payroll taxes are up 7.6% from a year ago, with the gains picking up in recent months.

"Those gains suggest solid growth in wages and salaries in the national economy," CBO said.

While gains are broad, those at higher-income levels are enjoying bigger salary hikes. Because they pay higher rates, federal tax revenues soar when they do well.

Those making over $200,000 now pay 46.6% of total income taxes, presidential adviser Karl Rove recently said. That's up from 40.5% - despite Bush's tax cuts.

Instead of having the regressive and disasterous effects that the economic illiterates predicted, the aftermath of tax cuts are now a period of growth, the 'rich' paying more in taxes, and government taking in more revenue. Now, I don't necessarily believe that the second and third conditions are good things, but it is what's happening.

Who'da thunk it?

posted by Paul  permalink | |