October 3, 2007

Bush Supply-Side Cuts Played Out? Time for Another Tax Cut

Filed under: Economy,MSM Biz/Other Ignorance,Taxes & Government — Tom @ 6:15 am

The “magic” of the 2001 and 2003 (mostly 2003) supply-side tax cuts looks like it has just about run its course. Presidential candidates taking their cues from Old Media, which is gushing over ideas like “baby bonds,” the usual “soak the rich” schemes, and (of all things) a war tax surcharge, are going to miss a great opportunity to steer the agenda towards what taxpayers really want — a tax cut.

It’s clear that my prediction of $315 billion in federal receipts during September is not going to be met, as this chart shows (line item data is from the Daily Treasury Statements of 9/29/06 and 9/28/07; the Sept. 2006 total can be found in the latest Monthly Treasury Statement; the final two items in Sept. 2007 column are estimates):

Sept07EstdTreasRecs

I believe that final receipts for September 2007 will be just barely higher than they were in September 2006. That’s significant, because September is one of the four big months for estimated tax payments (January, April, and June are the others). September 2007 was held back a bit because it had 19 business days instead of 20, which explains why withheld items didn’t go up much, but the flatness in the combined total of corporate income taxes and individual non-withheld payments was the bigger factor.

It has been a great run (Sept. 2007′s estimate is incorporated into the graphics below), but I believe it’s just about played out:

Prev12MosChartUSrecs
Prev12MosGraphUSrecs

The Treasury took in almost $800 billion more in the 12 months that ended in September of 2007 than it did in the 12 months ended in September of 2003. The 9.6% annualized growth rate during that 4-year period is phenomenal, and cannot possibly be explained as due to economic growth alone. What is more accurate to say is that the supply-side cuts led to the growth that occurred after a difficult period that began with the fourth quarter of 2000 and ended in the middle of 2003.

But you can see from the results for the 12 months just ended that the revenue gushers of the previous two years have receded. Well, you can’t expect a supply-side tax-cut boost to the economy to continue without ….. enacting another supply-side tax-cut boost.

Ryan Ellis at the American Shareholders Association, who refers to evidence that Americans “want Congress to deal head-on with the economy, which includes new tax cuts,” has many very good suggestions:

  • The most pressing need is to make the expiring tax cuts permanent. Failing to do so would result in capital gains, dividends, and small business tax increases that would definitely wreck the economy. (plus it will slow down the economy well ahead of when they actually expire — Ed.)
  • The corporate income tax is the highest in the industrialized world, behind only Japan. At 39%, the U.S. rate is far higher than the European average of 25% (and falling).
  • Capital, the formation of which is key to economic growth, is taxed multiple times in the current tax system. This can be fixed by full business expensing, killing the death tax, zeroing out the capital gains and dividends tax, and expanding tax-free savings accounts.
  • The U.S. is the only country in the developed world that double-taxes the international income of its taxpayers. This forces U.S. companies and wealthy individuals into offshore tax havens. The U.S. should shift to a territorial tax system like the rest of the world has.
  • Dozens of countries, from Hong Kong to Estonia, have adopted a flat rate income tax. Almost nothing would do more for economic growth than having a flat income tax rate in the teens.

I would take death tax repeal, elimination of the Alternative Minimum Tax, and a 10% across-the-board cut for everyone. In an ideal world, I’d take the Fair Tax, effective January 1, 2010.

Presidential candidates should be talking up these ideas, but they aren’t. What are they waiting for, a favorable media climate? Ronald Reagan didn’t wait for that, and if candidates inclined to consider tax-cut ideas wait for that, they might as well tape their mouths shut now and get it over with.

Cross-posted at NewsBusters.org and Wide Open.

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3 Comments

  1. What the economy is starting to feel is the “Democrat Effect.” With the prospects of Democrats in power, the smart money (i.e. businesses and capital) is preparing a year ahead of time for the coming punishment. At minimum the tiny tax rate cuts of 2001 and 2003 that saved the US from the perfect storm of insults to the economy need to be made permanent. REAL tax relief is needed, but that ain’t gonna happen when the economic Grim Reapers are in charge. Only this time, they aren’t going to have the luxury of raised taxes being offset by serendipitously benefiting from the greatest tech/econ innovation in history (computer) and a “peace dividend” that allowed them to cut the military (fall of Soviet Empire).

    While everyone else is moving to supply-side tax and economic policies, these morons want to move toward a centralized economy. And there’s a real possibility that it will happen! Someone needs to be making tax cuts and tax reform an issue to contrast the economy killers on the left.

    If this doesn’t happen, we are going to see capital flight, Eurosocialism minimal growth, and starting in 2009, a decrease in military re-ups and recruiting. Just a look ahead to a Democrat utopia.

    Comment by Joe C. — October 3, 2007 @ 7:09 am

  2. When the country borrows a trillion dollars and then spends it on war contractors only to tax them on the same borrowed money you really can’t count that as new income. Somebody has to pay it back. Quit trying to play a shell game with my money!!!

    Comment by fp — October 3, 2007 @ 9:35 am

  3. fp;

    The money this country spends on the war is only small portion in comparison to the wasteful social “entitlement” spending Congress doles out in the federal budget. In a recent address by the US Comptroller, he stated just that. However, he did say that unless Congress stops spending like they currently are, our economy is in serious jeopardy. So friend it is the social programs like Medicare, and social security that are the greatest financial burden. But I’ll bet you are all for universal health; right?

    I would also add that contractors are actually a cost savings for this government. They do work at a greatly reduced cost than having active duty or title 10 NG and Reservist doing it because there is little overhead involved. If you want to reduce wasteful Defense spending, then complain to Congress about the number of fat asses sitting in the Pentagon while real soldier fight in Iraq. Then complain about the massive Naval and Air Force bloated big ticket items that Clinton pushed through, which have no relevance on the modern battlefield. But again, in case you didn’t catch it the first time, social spending is the problem, not the war.

    But I question whether you are actually concerned with the health of our finance or just a complainer?

    Tom;

    While I think the tax cuts were good and I applaud them, we have to reduce government spending and bureaucracy. Otherwise, the temptation for tax increases will be too great; especially if the socialists/democrats win Congress.

    Clearly there is much to applaud Bush over and much to denounce, but he has been a miserable failure at reducing the size of government.

    Comment by Brian — October 3, 2007 @ 4:51 pm

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