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Smells Like Victory
The sweet fragrance of the Laffer curve versus the stench of Krugman's tax-increase scheme.


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Donald L. Luskin

In his New York Times column Tuesday, Paul Krugman complains that President Bush’s tax cuts have put the nation in a “fiscal quagmire.” America’s most dangerous liberal pundit says “we won’t get out of that quagmire until a future president admits that the Bush tax cuts were a mistake, and must be reversed.”

Now, consider reality. Take a look at the chart below, which tracks total federal tax receipts in trillions of dollars, year by year (source: Office of Management and Budget). Revenues peaked in 2000 with the last gasp of the 1990’s boom. They were in free-fall in 2001, 2002, and 2003. But you can’t blame the tax cuts for very much of that. It wasn’t until 2003 that any but a tiny fraction of Bush’s tax cuts were put into effect. After the cuts went into action, however, revenues have soared — and they are forecasted to reach all-time highs in a few short years.

Krugman snarls,

The usual suspects on the right are already declaring victory over the deficit, and proclaiming vindication for the Laffer Curve — the claim that tax cuts pay for themselves, because they have such a miraculous effect on the economy that revenue actually goes up.

Count me — and anyone else who’s seen this chart — as among “the usual suspects.” And as long as we’re making cinematic allusions, let me add that I love the smell of tax revenues in the morning. Smells like victory.

The best Krugman can do is forecast that the explosion of revenues in the wake of the 2003 tax cuts won’t last. Why? For one thing, Krugman claims that “the economy as a whole is, if anything, doing worse than one would expect at this stage of an economic recovery.”

Again, consider reality. Since the recession bottom in the fourth quarter of 2001, real GDP has grown 12 percent. That beats the 11 percent growth over the comparable period in the previous economic recovery — the one that began on Bill Clinton’s watch, which Krugman once called an “economic miracle.”

Krugman also frets that the revenues flowing into the U.S. Treasury are the wrong kind. Not enough revenue growth, he complains, is coming from taxes “tied to the number of jobs and the average wage, such as payroll taxes and income taxes.”

Consider reality: Personal withheld tax revenues are up 7.3 percent compared to last year, and social insurance and retirement receipts are up 6.4 percent (source: U.S. Treasury). Yes, there’s been even greater growth in corporate tax revenues. But why are corporate revenues the wrong kind of revenues?

And yes, there’s been a surge in non-withheld personal income-tax revenues, which Krugman guesses is mostly from capital gains. Why are those the wrong kind of revenues? Perhaps because slashing the capital-gains tax rate was the signature of Bush’s 2003 cuts; a surge in those revenues proves just how vindicated the adherents of the Laffer curve really are.

One wonders what kind of growth would be good enough for Krugman and the Democrats. Don’t kid yourself that they’d be satisfied even if George W. Bush left office, the 2003 tax cuts were repealed, and all deficits magically vanished. They won’t be satisfied until tax rates are raised to the point where government is seizing an unprecedented fraction of personal wealth. Krugman recently told an Asian newspaper,

We should be running surpluses … We should be getting 28% of GDP [gross domestic product] in revenue. We are only collecting 17%.

Consider reality (and if you’re not used to thinking about tax revenues as a fraction of GDP, this reality will come as quite a shock). As the chart below shows, the federal government has never collected more than about 21 percent of GDP in taxes. Krugman wants it to collect 28 percent — even more than was collected at the very height of World War II.

What would government do with such money (assuming, fantastically, that the attempt to collect that much in tax dollars wouldn’t utterly destroy the economy)? Krugman has at least one idea. Both of his Times columns last week (here and here) were pleas to “put aside our anti-government prejudices” and “do something” about obesity — “America’s fastest-growing health problem.”

Something tells me Krugman hasn’t checked with Michael Moore or Teddy Kennedy about that particular idea for spending taxpayer money. They’ll have to work that out among themselves later.

For now, the first step is to seize every taxpayer dollar they can. Every time they talk about repealing the Bush tax cuts, that’s what they’re trying to do.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at [email protected].



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