Sunday, June 19, 2005

The Last Laffer

What happens when the government lowers the tax rate on production, work, investment, and risk-taking? Answer: There is more production, work, investment, and risk-taking. The result: There is more, not less, tax revenue collection for the government. Economics 101, and the simple theory known as the Laffer Curve (illustration here). 0% taxation will yield no tax revenue for the governement and 100% will yield no tax revenue for the governement (since there is no incentive to work). Therefore, the government must seek a tax rate in between those extremes that will produce a maximum revenue.

Stephen Moore
, in this morning's Wall Street Journal, explains that the Congressional Budget Office released its latest report on tax revenue earlier this month. "The numbers," he writes, "are an eye-popping vindication of the Laffer Curve and the Bush tax cut's real economic value." Federal tax receipts in the first eight months of fiscal year 2005 rose 15.4% over receipts in 2004. Since Bush's cuts in 2003, individual and corporate tax receipts have risen 30%. The Bush tax cuts have also created a revenue windfall for states and cities. And in the private sector, there is an investment boom. In short, the "tax cut rates have created a virtuous chain reaction of higher economic growth, more jobs, higher corprorate profits, and finally more tax receipts."

This doesn't mean that President Bush is necessarily a fiscal conservative's dream. He is, after all, a big-government conservative (as Fred Barnes accurately labeled him). Along with tax cuts, there also needs to be more serious restraint in spending.

But the fact remains that the Bush tax cuts have been great for the economy, and great for the middle class. Just remember that when 2008 rolls around, and we begin to hear about those evil "tax cuts for the rich" and how it hurts the poor and the middle class.