Friday, November 18, 2005

Bush falls off the "Laffer Curve"

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Treasury Secretary John Snow: "Millions of Americans have benefited from these important tax policies either directly through lower taxes or indirectly through new and better jobs and greater economic security for families."

The Laffer Curve is the theory most frequently used to explain how supply side economics benefits government spending. It says that if tax rates rise beyond a certain level they actually discourage economic growth, thereby reducing government revenues. By contrast, as can be seen in Continental Europe, excessive taxation and regulation stagnates economic growth, reduces revenues, undermining government's ability to meet its citizen's needs.

So what is the ideal amount of federal taxation as a percentage of GDP in the US? 25%, 20%, 15%? Under the Bush tax cuts we have gone from 20.09% to 16.3%, a dramatic tax cut. As a result, we were told that government revenues would exponentially grow, just like under Ronald Reagan...

Frequently these days, you will hear Bill O'Reilly say something like this: "President Bush then came in and cut taxes for everyone. And guess what? Federal tax revenues will be more this year (2005) than at any time during the Clinton administration."

This is a completely disingenuous statement. It's like saying economic growth in the 1990's was faster than the 1980's simply because GDP was higher each year. You have to make an adjustment for inflation. Somebody please explain this to O'Reilly if you get the chance.

Inflation adjusted tax receipts during the Clinton Administration and Bush Administration can be seen here:

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The key is not just that government revenue is well below the relative levels that the Clinton Administration had impressively built towards. It's not just that government revenue growth isn't sustained. The key is that in spite of this, in a Republican controlled Congress, Federal Spending continues to grow unabated. In 1992 Russ Perot ran one of the most successful Independent Presidential campaigns in US history on a platform of paying down the national debt. In 1992 the national debt was around $4 trillion. Since Bush came to power the national debt has sky-rocketed from $5.5 trillion to $8 trillion with predictions that the debt will reach $10 trillion by the end of his Presidency.

A five year old can cut taxes, raise spending and get the economy to grow rapidly in spits and spurts. But the risk is inflation, high interest rates, and a recession, all of which loom large over the next three years. The challenge is to create secure, stable, lasting economic growth which guarantees prosperity and opportunity, and also the fiscal integrity of government spending. This economy might grow at 4% in the next quarter and create 500,000 jobs, but in the next employment might be down, and after that we could be facing a recession... things are that unpredictable. In the interim, growing deficits and the national debt compromises everything from our ability to fight wars, guarantee social security, cope with national disasters like Hurricane Katrina, or recover from a terrorist attack.

To respond to Treasury Secretary John Snow, economic security is exactly what families do not have right now.

Related Links:
Tax Policy Center: Historical Federal Receipt and Outlay Summary.
Previous Article: Lyndon Dubya Bush.
Hat Tip: Talking Points Memo.

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