Wednesday, January 04, 2006

Debt and Taxes

A monthish ago I posted regarding Congress's tax cuts and expressed my displeasure that they would go and cut taxes after we just barely managed to push through some budget cuts. I expressed my displeasure that Congress would do something to unbalance a budget that was so recently pushed in the general direction of balanced. But others commented (not inaccurately) that these tax cuts might in fact create more revenue. Which can be justified using the Laffer Curve, depending on what side of it one thinks that we are on.

The New York Times discusses paper put out by the Congressional Budget Office that examines the effects of tax cuts

The recent analysis by Mr. Page at the Congressional Budget Office
dismisses the idea that tax cuts may actually improve the government's fiscal
situation. Even in his most generous scenario, only 28 percent of lost tax
revenue is recouped over a 10-year period. The United States, it seems, is
firmly planted on the left side of the Laffer Curve.

Recent experience corroborates this prediction. In the second quarter
of 2001, just before the first of President Bush's tax cuts took effect, federal
receipts from personal taxes accounted for 10.3 percent of the economy. By the
end of the post-recession slump, receipts had dropped to 6.4 percent. But in the
third quarter of 2005, with the economy booming, they were still under 7.5
percent - an enormous difference. In dollar terms, federal receipts from
personal income taxes, at $802 billion in 2004, are still lower than they were
in 1998 ($826 billion) and much lower than in 2001 ($994 billion).

Jon Henke at QandO has a post that makes the important point that while from a big picture perspective the whole US might be on the left of the laffer curve, certain sectors may not be, and so cutting their taxes might actually increase revenue more than across the board cuts. And well, taxes are bad, so I can get behind that.

I just hope our politicians think about the importance of a balanced budget today and seek to acheive that without blindly hoping that we are on the right side of the laffer curve, because there is a 50% chance that we aren't.

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