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Monday, June 20, 2005

US deficit shrinks: a vindication for tax cuts?

csmonitor.com:

But a surge in tax receipts has offered some encouragement. For the first eight months of this fiscal year, the government ran a deficit of $272 billion. That's down from the $346 billion deficit for the same months in fiscal 2004. Receipts were up 15 percent from last year. While that revenue surprise won't cure the nation's overspending problem, it has set off a flurry of budget speculation. A number of economists are lowering substantially their estimates for this year's deficit. Ed McKelvey, an economist with Goldman Sachs, for example, revised his forecast of the fiscal 2005 deficit to $350 billion, down from $412 billion. Some hope, perhaps unjustifiably, that the deficit will continue to shrink. Meanwhile, experts are trying to figure out where the extra revenue came from. Leonard Burman, a former Treasury official and now an economist at the Urban Institute, suspects the April-May revenue jump reflects a surge in nonwithheld personal taxes - big bonuses, for instance, paid by Wall Street firms to their executives and other top employees, or handsome capital gains from stock sales in the resurgent stock markets. Another factor: The well-to-do have been getting richer, and they still face higher tax rates than average taxpayers or the poor, despite the Bush tax cuts. Thanks to a rise in corporate profits last year, corporate tax payments have also risen 47 percent. Moreover, a special tax break, a bonus depreciation on investments in plant and equipment, expired at the end of 2004. Perhaps the most interesting speculation revolves around whether long-term effects of tax cuts are beginning to kick in. Many supply-side enthusiasts certainly believe they are. The new tax revenue numbers are 'an eye-popping vindication of the Laffer Curve and the Bush tax cut's real economic value,' wrote a Wall Street Journal editorial writer.
Supply side economics has some mixed performance data, partially at least because there are a lot more factors than taxation in economic performance. However, this is good news for supply side advocates. Of course that good news is bad news for small government advocates hoping to 'starve the beast' since if cutting taxes raises revenues, government will still grow despite tax cuts. Obviously, supply side cuts can't increase revenue forever, if revenue generation for government is your goal there must be a maximum point, as it is obvious that will the ultimate in low taxes - zero, there would be no revenue at all. The growing economy that is promoting this revenue jump is unambiguously a good sign however. (via Running for the Right)

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