Karl Popper said that the validity of a scientific theory is dependent upon its ability to accurately predict the future. If that is so, then the economic data so far this year have been very friendly to the theories of supply-side economics. In particular, the data have been kind to the supply-side’s most controversial provision: the effect of rate cuts on tax revenues.
A keynote aspect of supply-side thought has always been that, at times, cuts in marginal tax rates can actually lead to an overall increase
in governmental tax revenues. BuzzCharts thinks this idea can be demonstrated best through an experiment: Would you bother going to work if the government took, say, 150 percent of your income? That is, would you still work if the government took every dollar you made plus fifty cents from your personal savings for each of those dollars? Of course you wouldn’t. In such a situation, you’d have no chance of creating any income, would not work, and the government’s tax receipts would be zero. Conversely, lowering tax rates can increase tax receipts — but only to the point where rates get so low that receipts decrease again.
This concept was introduced in the 1970s by Art Laffer, when he famously sketched his Laffer Curve on a napkin. So, you might ask, where on that curve are we now? Are we above, or below, the most optimal point?
President Bush’s most recent tax cut proves that tax rates were, in fact, too high. This is demonstrated through the simple fact that the first half of fiscal year 2004 is showing higher tax revenues than the same period for fiscal year 2003. Between October 2003 and March 2004 (the first half of FY 2004), tax receipts were at more than $850 billion, which is $25.3 billion higher than receipts for the year-ago period.
This means that federal tax receipts went up rather than down after the Bush tax cuts of 2003. America has just passed the midpoint of fiscal 2003 and so far the data seems to be confirming the supply-side model. The Bush boom is big enough that it has already affected the budget.
– Jerry Bowyer is the author of The Bush Boom and an economic advisor to Blue Vase Capital Management.He can be reached through www.BowyerMedia.com.