Laffer's Victory

Editorial of The New York Sun | July 10, 2006

It's official — Arthur Laffer wins. New data show federal revenues surged in the first three quarters of the current fiscal year. Corporate tax receipts are up more than 26% over the same period last year, ringing in at $250 billion. Individual income tax collections, at $791 billion, are up 14% over the first nine months of fiscal 2005. The Congressional Budget Office projects corporate tax receipts will total $330 billion by the end of the fiscal year. As a result, the deficit for the year is expected to be about $300 billion, down from $318 billion last year and $412 billion the year before.

What, you ask, has led to this miraculous event? A tax cut, it turns out. Or rather, an array of tax cuts, on corporate income, personal income, and capital gains. These tax cuts, passed in 2001 and 2003, appear to be having the desired effect of spurring economic growth by creating addition incentives for work and entrepreneurship. The latest numbers, moreover, offer some hard data to challenge some of the charges leveled against President Bush and congressional Republicans in respect of tax cuts. These tax cuts haven't exactly benefited "the rich." A third of those higher income-tax revenues came from the highest-earning 1% of households, according to the New York Times.

That said, the deficit is still projected to be $300 billion, even if that's lower than it might have been. The latest budget estimates, then, throw down a gauntlet to the alleged Republicans in Congress. Thanks to the incentives provided by the tax cuts, the rest of the economy is doing the best it can to make up the deficit through economic growth. But non-defense discretionary spending has increased by a third under President Bush. Supply-side tax cuts will not grow us out of a deficit unless the Congress can keep federal spending increases from outpacing economic growth. At least Republicans now have hard data to rebuff Democratic claims that tax increases are the solution to federal budget woes or that tax cuts favor "the rich." Thank you, Professor Laffer.