The Tax Cuts Worked, and that May Be the Problem

With recent reports predicting a lower-than-expected federal budget deficit, supply-siders have more evidence that backs up their theories—along with some unexpected challenges.
Put simply, under supply-side thinking, government should intrude as little as possible in the economy, letting producers produce and consumers consume.

That means low tax rates and fewer regulations and barriers to competition, which encourages economic efficiency. Economic efficiency results in economic growth and from a government revenue standpoint, economic growth means higher incomes and more government revenues.

With this logic, the Bush administration and Congressional Republicans pushed through a series of tax cuts in 2003.

And sure enough, higher-than-expected revenues made up nearly all of the current $127 billion reduction in the deficit projections, from $423 billion in February to $296 billion in July.

(Don’t expect the major media to make a big deal of this, since it reflects well on the Bush administration and poorly on tax-increase proposals.)

But then there’re the challenges: The lower deficit may spur lawmakers to spend more.

That was the case in the late 1990s, when soaring revenues from 15 years of Reagan tax cuts produced a surplus for the first time in 30 years.It was as if someone had bashed open a piñata, and members of Congress were ready to grab the candy.

From fiscal 2000 to fiscal 2006, spending increased by more than 43 percent. Revenues, by contrast, only rose a bit more than 12 percent. But the inflation rate increased by just under 20 percent over the same time.

Of course, in supply-side theory, those deficits don’t make much difference. But when they are big enough, they may have a political impact.

A relatively recent notion floating around Washington claimed that large deficits would force Congress to restrain spending, not wanting to exacerbate the deficit problem.

Well, that clearly hasn’t happened. Indeed, the Washington newspaper, The Hill,recently reported, “House Republicans are struggling to move a labor, health and human services (HHS) appropriations bill containing more than 1,700 earmarks that would help lawmakers of both parties in their November reelection bids. . .”

Supply-side economics works, but much of the benefit is at risk because unchecked federal spending gives liberals an open invitation to call for tax increases. Unless Republicans get control of federal spending, their biggest victory (the Bush tax cuts) may be their biggest defeat.

Source: Institute for Policy Innovation

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