The latest Congressional Budget Office statistical release on federal revenues provides a critical insight into the success of supply-side economic policies. When President Bush bullied the Congress to enact not one but two tax cuts during his first term in office, naysayers of both parties clung to the old saw that tax cuts increase budget deficits. In the face of wars in Afghanistan and in Iraq, as well as more than one natural disaster, federal revenues have been unexpectedly ebullient.
Federal revenues have exceeded the most optimistic projected gains. The following chart provides a graphic view of how the CBO underestimated the success of the Bush tax cuts. The key distinction is that, over this period, the “windfall” in government revenues amounted to a whopping $436 billion. Whether you believe this is despite of, or because of, the tax cuts, it is like having your cake and eating it too.
But let’s let facts be facts. The increase in total revenues since the 2003 tax cuts amounted to an incredible $785 billion. To add a little spice to the supply-siders’ cake, here are some additional statistics from the Wall Street Journal:
– The federal deficit as a percent of GDP is down to 1.2 percent, about half the average of the last fifty years.
– Since 2004, deficit spending has tumbled by $251 billion, one of the most rapid three-year declines in history.
– Income, dividend, and capital-gains tax rates were all cut in 2003, but individual income-tax receipts have soared by 46.3 percent in four years.
– Overall federal revenue is now 18.8 percent of GDP, compared with the 18.2 percent average of the past forty years.
Despite these incredibly good numbers, however, politicians who are in the running for the presidency and Congress next year espouse the following policies:
– Let the Bush tax cuts expire;
– Don’t cut taxes unless you cut spending;
– Increase taxes on high-income earners to pay for the wars; and
– Increase taxes to pay for cures for Social Security and Medicare/Medicaid.
Given the fact that Uncle Sam is raking in more than an additional $785 billion in tax revenues, it appears as though Americans are much better off with the current tax-cut scenario in place. My guess is that most of the folks who paid these taxes earned them by working more and investing more.
But I’ll add that the federal government is still taxing Americans too much. When the budget deficit falls to a measly 1.2 percent of GDP, fiscal policy is contractionary — or at least the rate of stimulus has slowed dramatically. Yet some politicians are running for national office on a major tax-increase platform. To reiterate, politicians want to raise taxes even though total tax revenues are 18.8 percent of GDP compared with an average of 18.2 percent during the past forty years.
Maybe I’m somewhat biased as an economist, but the most important policy a government can advocate is one that promotes economic growth and creates an environment for rising standards of living. Raising taxes, pushing for trade protectionism, and accelerating regulation are certainly not policies that will accomplish these ends.
Here are a few questions for pollsters to ask voters in light of the latest statistics:
1. Would you rather have lower taxes and higher government revenues, or higher taxes and lower government revenues?
2. Would you support a party that offers you higher standards of living and lower taxes, or lower standards of living and higher taxes?
3. Would you prefer a party that advocates protectionism that saves some American jobs but causes many more Americans to lose their jobs?
The facts are the facts. Politicians interested in continuing the supply-side success story have all the ammunition they need to blow anti-growth policies out of the water between now and Election Day 2008. Let’s hope they use it.