A cornerstone of supply-side economic principles is that cuts in marginal tax rates can, at times, actually lead to an overall increase in governmental tax revenues. The idea is best demonstrated through a thought experiment: Would you bother to work if the government took, say, 125 percent of your profit? That is, would you still work if the government took every dollar you made plus a quarter from your personal savings for each of those dollars? Of course not. In such a situation, you’d have no incentive to create any profit, would not work, and the government’s tax receipts would be zero. Conversely, the act of lowering tax rates increases tax receipts — but only until the point where rates get so low that receipts decrease again.
This concept was introduced by Art Laffer, who famously sketched his Laffer Curve on a napkin in the 1970s. The question to ask ourselves is this: 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 had been, in fact, too high. This is demonstrated through a simple fact: The start of fiscal year 2004 is showing higher tax revenues than the same period for fiscal year 2003. In October and November of 2003 (the first two months of FY 2004, and the only ones available at this point), tax receipts were at more than $254 billion, which is $9.5 billion higher than last year’s receipts over the same period of time.