According to Paul Krugman, America’s looniest liberal pundit, “there is no longer any coherent justification for further tax cuts. Yet the cuts go on.” In a recent New York Times column he wrote that “Republicans have turned into tax-cut zombies. They can’t remember why they originally wanted to cut taxes … they just keep shambling forward, always hungry for more.”
When the Republicans shamble back to Washington later this month after Congress’s holiday recess, we’ll see just how wrong Krugman is — on every count.
For one thing, last year’s unfinished 2006 revenue reconciliation bill, which Congress will have to deal with promptly in the new session, isn’t about “further tax cuts,” or even “tax cuts” at all. It’s about keeping tax rates just where they are. If today’s tax rates on dividends and capital gains aren’t extended, then the capital gains rate will jump by as much as a third and the dividend rate will more than double in tax years after 2008.
But we shouldn’t be surprised that Krugman calls keeping tax rates where they are “cuts.” He bemoans the “cruelty” of the “mean-spirited spending cuts” in the latest budget bill — which has federal spending growing by more than 51 percent over the next five years.
And Krugman is wrong if he thinks the Republicans who originally enacted today’s tax rates are zombies. They know precisely why they put lower dividend and capital gains rates in place in 2003, and why the reconciliation bill must extend them past their current 2008 horizon.
For example, I asked Rep. John Boehner, the Ohio Republican whose hat is in the ring to succeed Tom DeLay as House majority leader, if he considered himself a tax-cut zombie. “No,” he said, “extending the cap gains and dividend rates is critically important for investments in our economy. Moving that horizon out is the most important part of the bill, because what investors want is certainty. I think we’ll unleash more investment.”
Boehner is precisely right — and all the economic evidence supports his position. Consider payroll jobs. Coming out of the recession that began in early 2001, the total number of payroll jobs hit its very low the month the 2003 tax cuts on dividends and capital gains were enacted. Since then, the economy has added 4.6 million new jobs.
After a savage bear market that ended shortly after the 2003 tax cuts were proposed, and shortly before they were enacted, the S&P 500 now stands at highs not seen in more than four-and-a-half years. The total return to stock investors from the day the tax cuts were signed into law has been 41.3 percent.
Glossing over all that reality, Krugman kvetches that there has been only “a partial recovery in federal tax receipts from their plunge between 2000 and 2003.” That’s simply a lie. Today, federal tax revenues stand at all-time highs. According to the U.S. Treasury’s latest monthly statistical report, November tax receipts were $138 billion. Add that to the previous 11 months, and you get a trailing 12-month total for tax receipts of $2.2 trillion. That’s the largest amount ever collected in a 12-month period. In fact, receipts have been setting records every month since last August, when we first surpassed the $2.1 trillion record set in April, 2001.
But Krugman continues to whine: “Revenue remains lower, and the federal budget deeper in deficit, than anyone expected a few years ago.” Anyone? That just can’t be true. Someone, I’ll grant you. For example, the Congressional Budget Office, in it’s August 2002 Budget and Economic Outlook — written before the 2003 tax cuts had even been proposed — expected $2.224 trillion in revenues for fiscal 2005 (the fiscal year ended last September). In a recent budget update (October 6), CBO estimated fiscal 2005 revenues at $2.154 trillion. So, for this “someone” at least, yes, revenues remain lower than expected. But barely — only by $90 billion, or about 4 percent.
But let’s dig deeper into CBO’s analysis. Back in that 2002 report they estimated fiscal 2005 GDP to be $11.936 trillion. In fact, it turned out to be $12.308 trillion — $372 billion higher. So let’s put these numbers together. We get $90 billion less than expected in tax revenues. We get $372 billion more than expected in GDP. That’s a terrific deal, if you ask me.
So while Krugman derides supply-side economics as “hokum for the yokels,” all the evidence points to the reality that lower tax rates do lead to faster economic growth. And to exaggerate a bit as Krugman himself might do, there isn’t “anyone” who seriously disagrees with that. For example, in a New York Times column last week, economics reporter Daniel Altman crowed about a recent CBO study that purported to show that tax cuts don’t fully pay for themselves in increased revenue. But in the 14 scenarios examined by the CBO, all but one showed gross national product increasing after a 10 percent across-the-board tax cut.
Why does it work? Because, as Boehner puts it, “The problem is the government is too big and takes too much money out the economy and leaves too little for investment in the future.” You want a bigger, faster-growing economy? Then cut taxes — or at least leave them at low levels, like the Republicans in Congress are trying to do.
It’s so simple, even a zombie can understand it. Leftist economics professors like Krugman, though, are another matter.
– 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 don@trendmacro.com.