An eye-opening headline in this morning’s Washington Post went like this: “Tax Receipts Exceed Treasury Predictions.” After reading the story I wanted more details, so I dug inside the daily Treasury statements. There I found that non-withheld receipts from capital gains, dividends, stock options, and other sources came to $144 billion for the April tax-payment month. That’s an incredible 29 percent increase from a year ago when receipts fell by 5 percent.
Consequently, the budget deficit for fiscal year 2005 should come in around $395 billion, or 3.2 percent of gross domestic product, a calculation that includes the military-appropriations supplement for the war on terror. Last year the budget gap was $412 billion, or 3.6 percent of GDP. That led to the Treasury Department borrowing an additional $42 billion. But as a result of the increased tax receipts this year, Treasury will actually pay down $42 billion in debt during the April-June quarter.
Whether the deficit goes up or down, the Treasury’s new idea to re-open 30-year bond issues is a good one. At historically low interest rates, the whole $4.5 trillion of publicly held national debt, which comes to 37 percent of GDP, should be refinanced and permanently funded through long-term offerings. And why stop at 30? Britain, France, and Japan use 50-year bonds. So should we. Insurance companies, pension funds, and other institutional investors will gobble up the paper.
That said, the news of higher tax payments is big. And the real story behind the numbers is the successful supply-side experiment that began in the middle of 2003, when investment tax rates were slashed on capital gains and dividends. With new incentives to counter the deflation of investment during the 2000-02 period, both capital formation and economic growth came back from the dead.
Real GDP since the tax cuts has averaged 4.3 percent at an annual rate, whereas growth was only 2.4 percent during the anemic recovery that preceded the tax cuts. The latest government data on tax collections for calendar-year 2004 confirm a tax-cut-led recovery through the explosion of tax receipts at lower tax rates. Once again, the Laffer curve is working.
With more people keeping more of what they earn and invest, after-tax, a major new economic boom has been launched. Enormous wealth creation from real estate, stocks, and small-business formation is the backbone of this entrepreneurial recovery. Despite the rantings of the naysayers in the mainstream media and on parts of Wall Street, strong economic expansion will continue for many years to come.
Supply-siders in the White House and the Republican Congress have the economic story absolutely right. That is why the Bush investment tax cuts have been extended to 2010 from 2008 in the congressional budget resolution. Even the estate tax rate may be cut to 15 percent, or eliminated altogether, in this Congress.
The biggest economic threat? That would be the Keynesians at the Federal Reserve tightening money too much and deflating the boom. But let’s hope the Fed comes to its senses and stops its rate-hiking crusade. Lower tax rates and strong growth are antidotes to inflation. But money-meddling at the central bank will only make matters worse.