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Tuesday, June 21, 2005

Spending, not Taxes, drive the Federal Deficit

Again and again I hear that Bush's tax cuts are responsible for the exploding Federal Deficit, and that tax cuts for "the rich" need to be repealed.

Unfortunately, many of the people who repeat this meme have no background or even study of economics, and have never heard of the Laffer Curve.

It's spending (projected to rise 3.6% in the 2006 budget, after a 33% rise during the Bush Presidency). [source: Cato Institute]

The tax cuts have brought in a 29% increase in tax receipts over the previous year. [source: NRO]

Larry Kudlow writes:
...the news of higher tax payments is big. And the real story behind the numbers is the successful supply-side experiment that began in the middle of 2003, when investment tax rates were slashed on capital gains and dividends. With new incentives to counter the deflation of investment during the 2000-02 period, both capital formation and economic growth came back from the dead.

Real GDP since the tax cuts has averaged 4.3 percent at an annual rate, whereas growth was only 2.4 percent during the anemic recovery that preceded the tax cuts. The latest government data on tax collections for calendar-year 2004 confirm a tax-cut-led recovery through the explosion of tax receipts at lower tax rates. Once again, the Laffer curve is working.

With more people keeping more of what they earn and invest, after-tax, a major new economic boom has been launched. Enormous wealth creation from real estate, stocks, and small-business formation is the backbone of this entrepreneurial recovery. Despite the rantings of the naysayers in the mainstream media and on parts of Wall Street, strong economic expansion will continue for many years to come.

Something to think about.