How Tax Cuts Help The Economy

Jerry Coffee
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Wednesday - June 01, 2005
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We tend to hear a lot in the mainstream media about the “soaring deficits” caused by “unfettered government spending,” and about the unconscionable saddling of our children and their children with a huge federal debt. The president’s tax cuts and continued insistence they be made permanent, even in the face of these “mounting deficits” would seem — on the surface at least — counterintuitive. A recent Wall Street Journal editorial, “Review and Outlook,” however, provides some surprising perspective.

The fact is, because of our current healthy economy “federal tax revenues are booming!” This fiscal year through April tax revenues increased by $146 billion to $1.26 trillion, an increase of 13.6 percent over the previous year. Federal income tax receipts indicate individual revenue is up 16 percent, and corporate income taxes are “rolling in even faster, tsunami- like, in fact, rising 48 percent.”

The Journal adds with some sarcasm, “Not even Congress can spend all this in just a few months, though it is trying.” The Congressional Budget Office (CBO) says spending in the first seven months of FY 2005 was about $97 billion, a 7.1 percent increase over FY ’04. Of special interest was a decrease in the increase in defense spending, 7.6 percent, down from the double digits of previous years. I know “a decrease in the increase” sounds like the classic budget double speak, but it does show the expense of our wars in Iraq and Afghanistan is not increasing year after year.

Now here’s the kicker! Contrary to the impression we’ve been given by the administration’s detractors, the CBO concludes that even while fighting an expensive war and covering increasing Medicare costs which grew by 9 percent, “the federal deficit will fall substantially this year, perhaps to the vicinity of $350 billion.” That’s down 15 percent from last year’s $412 billion — 15 percent in just a year!

Obviously, a deficit of $350 billion is not to be taken lightly, but the trend is encouraging. More encouraging is the realization that the economy is doing far better than the media care to report, with growth and income on the rise. Americans are earning more income of which the Feds are taking their share in taxes, albeit a smaller proportional share since the 2003 reduction in dividend, capital gains and marginal income tax rates; a reduction that “Robert Rubin (Clinton’s Secretary of the Treasury and economic adviser) and other worthies predicted would be fiscally disastrous.”

Tax revenues as a percent of the economy fell sharply after Sept. 11, but now they are climbing back to their “modern historical average” of around 18 percent of GDP. This is happening in spite of Bush’s lower tax rates, or as the Journal suggests, “because of them — since as incomes rise more Americans are pushed into higher tax brackets.”

How many times must we relearn the fundamental economic principle that lower tax rates stimulate economic growth which generates higher incomes which lead to higher tax revenues?

And, of course, the opposite is true: Higher tax rates (like a 12.5 percent increase in our GET — no matter what it’s for), higher property taxes and a bevy of new fee increases from sewer to auto registration will depress economic growth, reducing individual income and lowering tax revenue. That’s the last thing we need.

Are you listening, City Council? Mr. Mayor? Legislature?

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