July 12, 2007

WSJ: Time for Another Tax Cut. Today’s Treasury Report Supports the Idea

Filed under: Economy,Taxes & Government — Tom @ 2:40 pm

In May (see end of post), I suggested that the presidential candidates should be discussing not just extending the existing tax system (commonly known as “making the Bush tax cuts permanent”), but that they should be advocating another tax cut once they take office:

Leaving things as is until the next president is sworn in should set the stage for another supply-side tax cut that would include totally eliminating the AMT in 2009. Why not? History shows that further cuts will lead to more revenue and more economic growth.

Who will be the first GOP candidate to recognize the opportunity to build on Bush’s economic success, instead of merely basking in its glow, by making further cuts a part of his platform?

I referred only to GOP candidates. That’s because, despite their fondness for collecting taxes and the fact that the 2001 and 2003 Bush tax cuts have produced a record revenue gusher, the other party’s candidates seem congenitally disinclined to believe, despite nearly 50 years of proof (over 80 if you go back to the Roaring 1920s), that they can raise the money they think they need for their pet programs by cutting taxes, particularly the top marginal income-tax and capital-gains rates. (Quick: Where did all that money for LBJ’s Great Society programs come from? Answer: The Kennedy tax cuts.)

In a subscription-only editorial today, the justifiably less impatient Wall Street Journal thinks there ought to be another tax cut sooner, and they are absolutely correct:

The biggest threat to continued deficit reduction is not war spending, which as a share of the economy is still below what it was in 1992. The main risk is from a potential economic slowdown — which would mean less worker income and corporate profits to tax.

In 2003, Mr. Bush and Congress cut taxes on investment and high earners, and the happy result has been revenues aplenty. As a hedge against the economy cooling down, it might be time to cut tax rates further on the economy’s most productive assets and workers.

Multiple tax cuts have generated continually increasing government receipts in places as diverse as Hong Kong, Iceland, Australia, and of course the US in the 1980s. So why not?

Today’s Monthly Treasury Statement, which was released at 2PM, after the Journal’s editorial was published early this morning, supports the paper’s suggestion:

MonthlyTS0607

Back in October, just after the end of fiscal 2006, I was hoping that fiscal 2007 and 2008 revenues would go up by 9% each year, and that spending would “only” go up about 4%. If those two things were to happen, the reported budget deficit would be zero by the time President Bush leaves office. Though the revenues aren’t up as much as hoped, the actual differential between the increase in revenues and spending (7.5% minus 2.5%) is the same as the 5% difference (9% minus 4%) I was hoping for. If that differential continues, the budget is still on the same track towards balance.

Yep. It should be time for another tax cut to do even better. Would someone tell Nancy Pelosi and Harry Reid?

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ALSO: The Congressional Budget Office has lowered its estimated full-year deficit to $205 billion.

Barring something I’m missing, which I doubt (but with an instinctively free-spending Congress, one never knows), it’s going to come in lower than than that. If you add the current nine-month deficit of $121 billion to last year’s final 3-month July-September deficit of about $42 billion, that’s $163 billion. My guess is that the final three months’ deficit this year will come in at about $30 billion instead, for a full-year total of about $150 billion. It’s difficult to imagine that the full year will come in at $200-plus billion CBO is estimating.

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