Well, for the past four years actual tax receipts have consistently come in below expectations, so that the deficit is even bigger than one might have predicted given the administration’s don’t-tax-but-spend-anyway policies. Recent tax numbers, however, finally offer a positive surprise. The Congressional Budget Office suggests in its latest monthly budget review that the deficit in fiscal 2005 will be “significantly less than $350 billion, perhaps below $325 billion.” Last year the deficit was $412 billion.
The usual suspects on the right are already declaring victory over the deficit, and proclaiming vindication for the Laffer Curve – the claim that tax cuts pay for themselves, because they have such a miraculous effect on the economy that revenue actually goes up.
But the fact is that revenue remains far lower than anyone would have predicted before the tax cuts began. In January 2001 the budget office forecast revenues of $2.57 trillion in fiscal 2005. Even with the recent increase in receipts, the actual number will be at least $400 billion less.
It turns out that all of the upside surprise in tax receipts is coming from two sources. One is tax payments from corporations, up both because last year corporate profits grew much more rapidly than the rest of the economy and because the effective tax rate on corporations went up when a temporary tax break, introduced in 2002, expired. Both are one-time events.
The other source of increased revenue is nonwithheld income taxes – taxes that aren’t deducted from paychecks but are instead paid by people receiving additional, nonsalary income. The bounce in nonwithheld taxes probably reflects mainly capital gains on stocks and real estate, together with bonuses paid in the finance and real estate industries. Again, this revenue boost looks like a temporary blip driven by rising stocks and the housing bubble.”
Also note the following numbers, which are from the Congressional Budget Office here: http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0
In 2000, total Federal Receipts equaled 2.025 trillion.
In 2004, total Federal Receipts equaled 1.880 trillion.
The far right will argue that the lower tax rates actually increased revenue because they stimulated economic activity. However, the government is still taking in less money than it was in 2000, indicating the increase in revenues is as much the natural result of economic expansion rather than the Laffer Curve being correct. In addition, and as usual, the Republicans did not implement the complete “supply-side” theory, which states there must be a corresponding cut in spending when you cut taxes. Instead, the Republicans increased government spending at a 6.2% compound annual growth rate, at a time then they decreased revenue. This is the classic “guns and butter” philosophy that killed Johnson in the 1960s.
Simply put, an economy must decide between military and economic expansion. It cannot reasonably have both without massive deficits.
In addition, expect to hear all sorts of “tax cuts stimulate the economy” talk. While this may be true, the Republicans will fail to mention record low interest rates where banks were essentially giving away money after taking inflation into consideration.
Krugman does not add the corporate repatriation act to his list of reasons. However, I think it is vitally important. Bush gave corporations another tax break this year, when he gave corporations a limited-time tax rate of 5% on any foreign income repatriated to the US this year.
http://www.nytimes.com/2005/07/11/opinion/11krugman.html?hp
