The good news this week is the unexpected surge in federal tax revenues that is slashing the federal budget deficit by about $100 billion.
This is especially welcome news to supply-side tax-cutters who argued all along that lower tax rates spur stronger economic growth, which, in turn, creates more jobs that increases tax revenues. That is happening now.
It’s embarrassing news for President Bush’s diehard Democratic critics, who predicted his tax cuts would worsen the budget deficits and drive the government deeper into debt. They argued throughout last year’s elections that the tax cuts failed to grow the economy, create jobs or improve fiscal health.
Surely, it has become quite clear they were wrong on all counts — again. Indeed, it now appears new tax-receipt numbers at the Treasury are showing a sharp increase in individual, corporate and Social Security payments.
Treasury officials say, thus far, in fiscal 2005, which began last Oct. 1, they have taken in nearly $100 billion more than previously projected. Individual tax receipts were up an impressive 21 percent over last year. Business tax revenues rose a whopping 48 percent. They took in a record $61 billion on June 15 alone.
“The numbers are an eye-popping vindication of the Laffer curve [a theoretical correlation between tax rates and growth] and the Bush tax cut’s real economic value,” tax-cut crusader Stephen Moore wrote in the Wall Street Journal.
What this means is that, despite somewhat higher spending, “The federal deficit could come in at $325 billion to $350 billion, significantly better than the White House $427 billion projection, or the Congressional Budget Office’s $400 billion forecast,” writes The Washington Post’s economics reporter Jonathan Weisman.
Some fiscal experts now predict the deficit could come in at around $300 billion. My own belief is it will be even lower because the economy is growing much faster than expected. Last week, the U.S. Commerce Department reported that, for the first three months of the year, the economy was growing at an annualized 3.8 percent, instead of the 31/2 percent they initially reported. This revised estimate, in the face of Wall Street fears of economic slowing, provided “more ammunition for Republican boasts that their tax cuts are the cause of this performance,” Mr. Weisman reported.
But the doubters and doomsayers are not easily persuaded these higher revenue figures will last. “I find it difficult to get as excited about this as some people,” said CBO Director Douglas Holtz-Eakin whose CBO analysts have repeatedly underestimated the growth effects of the tax cuts.
The CBO had to be pulled kicking and screaming in the late 1990s before it acknowledged the budget was heading well into surplus territory due to much stronger economic growth following the GOP’s mid-1990s capital gains tax cuts.
Unconvinced as ever, Mr. Holtz-Eakin told The Post “I do hope people are taking this with a grain of salt and not thinking this is 1998 all over again.” But his doubts are what should be taken with a large grain of salt.
This economy has growth written all over it: GDP growth is nearly 4 percent; unemployment is 5 percent; the robust housing market shows no signs of slowing; U.S. manufacturing accelerated last month for the first time in seven months; consumer confidence was up sharply and inflation tame.
Another development helping the deficit picture will soon be apparent. The brakes are being gently applied to many appropriations bills moving through Congress this year. One example is the transportation bill, which Mr. Bush vowed to veto until House and Senate negotiators agreed to a lower figure closer to his budget proposal.
Of course, a $300 billion budget deficit isn’t chopped liver, either. In nominal dollars, it would be the third-largest ever. Still, it’s a start, and can be quickly reduced by stronger growth that has produced a record $11 trillion a year economy.
Now, however, it is important to focus on what works and what doesn’t. Supply-side tax cuts clearly work. They worked in the 1960s when the Kennedy tax cuts produced budget surpluses. They worked in the 1980s when the Reagan tax cuts led us out of a severe recession. And they are working now, chopping the deficit down in giant $100 billion increments.
Writing in National Review last week, business economist Michael Darda ridiculed the “no-growth neo-Malthusian Democrats” and the “root canal contingent” in the GOP who fiercely fought the tax cuts, predicting they would lead to deficits as far as the eye can see.
When will they ever learn?
Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist