Shots Across The Bow

And to what do the analysts attribute this 180 degree turn in the economic forecast?

This news hardly constitutes a 180 degree turn, except perhaps to someone that has been paying absolutely no attention.

But haven't the liberals been telling us for years that cutting taxes would decrease revenues? How could this be?

You are misreading this. Tax revenue is not higher. It's higher "than expected". See this article in the WaPo:

Smaller-than-expected tax refunds and rising individual tax receipts will pare back federal borrowing significantly for the first half of this year and could reduce the $521 billion deficit projected for the fiscal year by as much as $100 billion, Treasury and congressional budget officials said yesterday. . . .

All of this indicates that the improving economy is beginning to slow a three-year slide in overall tax receipts.

Tax revenue is not increasing. It's decreasing less -- and not enough to forestall the massive budgetary problems we face.

The primary problem with the Bush tax cuts is not their use as a recession-fighting measure (although they are overkill), the problem is that a very small percentage of the actual tax cut legislation will do anything to drive demand. The rest of it creates a lot of wealth, alright, but this has little to do with any economic turnaround.

What liberals won't tell you is that historically, when you cut taxes, revenue collections increase. It's happened every time.

Evidence for this assertion?

Either more people are going back to work or the people with jobs are working more hours, or they're getting paid more. These are the only possibilities to explain an increase in withholding receipts at a lower marginal rate.

Actually, there's another possibility that is glazed over in that article:

``We really don't know how many people got caught by the AMT,'' or alternative minimum tax, Lee said.

The AMT tax schedule is affecting more midde-class Americans, and tax projections are increasingly taking this into account, which would cause receipts to rise. The AMT and its improbable maintenance, is, of course, a large reason why the Bush administration can claim we can "afford" his tax cut legislation.

Of course, the liberal spin on all of this good news will be that the tax cuts that they claimed would bankrupt us were actually too small to do us any good.

What? No. The Bush tax cuts were far too big, and far too tilted towards the rich, and back-loaded heavily so that the worst is to come. The recovery we are seeing could have been accomplished with a much, much smaller tax cut.

All Together Now:"I Blame the Bush Tax Cuts!"

Believe me, I blame the Bush tax cuts.

Chris, until yesterday, I have not seen a single report about reduced borrowing or a decrease in the estmated deficit for this fiscal year. Feel free to provide links to any such articles.

The initial deficit was calculated based on estimated tax receipts of $1.92 billion, an increase over fiscal 2003 of $110 million. Since the deficit was against a projected increase in revenue, and that deficit is shrinking, that means that revenues must be increasing at a faster rate than expected. Check the budget here, page 22 for historical figures.

In other words, after the tax cuts, revenues were expected to increase, and they are, only faster than expected.

As for proof that tax cuts have resulted in revenue growth in the past, check the same chart mentioned above for the JFK years. Prior to his tax cut, revenues stagnated. Kennedy cut taxes significantly, reducing the tax on the upper income brackets from 94% to 70%. The result was an explosive jump in revenue collections of 22% over the four years of 1961 through 1964.

While the AMT could have some bearing on the decreased refund amounts we've seen, it does not affect withholding calculations, therefore cannot be used to try and explain away the increase in withholding receipts. The possiblities I listed are the only ones that can explain the higher than expected receipts.

The numbers don't lie; revenue is increasing, and faster than expected. Withholding receipts are up, indicating an expanding labor market. The economy is growing at a steady 4-5% per year. Government borrowing is at a significantly lower level than projected. Inflation is still under control.

It really becomes a question of where you want your tax dollars to come from. By cutting tax rates, we may see a short term drop in revenue, followed by a long term increase in revenue through sustained economic growth, as we've seen demonstrated in the past. A tax increase, on the other hand, creates a short term increase in revenue, followed by slowing economic growth and an inevitable recession, and its attendent decrease in tax revenues, requiring higher taxes, resulting in a vicious cycle.

I always find this whole "every time we've had a taxcut, revenue has ultimately risen" argument a bit silly. The fact of the matter is that, in general, the economy grows year after year with few exceptions and regardless of whether there has been a taxcut or tax increase or whatever. Thus there is always a larger and larger tax base, meaning that we should see higher tax revenues regardless of any effect that a taxcut has on the economy. By that whole logic, Clintons tax increase in the early 90s should have killed the economy..instead we had unparalleled growth.

Also, the real question isn't whether the economy grew after the Bush taxcut, the question is what would have happened without the Bush taxcut? We sank into a recession/bad times/whatever in late 2000/early 2001 and now 3.5 years later we are starting to see strong job growth. Am I really to believe that without the Bush taxcut we would have ended up in an unending recession or depression and never experienced job growth ever again?

The other part of the equation is how is the government going to balance the books in the short term and the net effect on the economy. The government has a couple of choices, it can borrow the money or cut spending. If it borrows and the total debt grows faster than the economy (as has been the case over the last couple of years) it means that interest payments as a % of GDP will rise and that will have to paid for by tax increases or cutting spending in the future.

The tax-cut proponents always like to toute the benefits of consumer spending on the economy, well what about the effects of government spending? Cutting government spending means that people lose their jobs, either those directly employed by the government or those by government contractors. It means that those on social assistance who have their payments cut have less money in their pockets to spend and aid the economy. In fact, many of the job reports last year talked about the fact that the government sector was one of the few that were seeing hiring.

The fact of the matter is that, in general, the economy grows year after year with few exceptions and regardless of whether there has been a taxcut or tax increase or whatever. Thus there is always a larger and larger tax base, meaning that we should see higher tax revenues regardless of any effect that a taxcut has on the economy.

If tax revenues grow at a faster pace than prior to the tax cut, or faster relative to economic growth post tax cut, then it is reasonable to credit the tax cut with at least some of the revenue growth, as is certainly the case here.

Also, the real question isn't whether the economy grew after the Bush taxcut, the question is what would have happened without the Bush taxcut?

All right then, tell us what you think would have happened without the tax cut. Would we be seeing the same growth, more growth, or less growth? Would jobs have come back faster or slower? Or did it make absolutely no difference? Include any data to support your position.

The other part of the equation is how is the government going to balance the books in the short term and the net effect on the economy. The government has a couple of choices, it can borrow the money or cut spending

You left out the best choice; grow the economy.

The US budget, as has been pointed out exhaustively in the past, is not a zero sum game. Economic growth brings revenue growth, reducing or eliminating the need for either of your choices. This article demonstrates that clearly, with a deep reduction in expected borrowing due to economic growth. No tax increase, and no spending cuts. While it would be unrealistic to expecty growth to wipe out the entire deficit, it is equally unrealistic to ignore it altogether when discussing deficit reduction.

The tax-cut proponents always like to toute the benefits of consumer spending on the economy, well what about the effects of government spending?

The short answer is that the overwhelming majority of government spending does not lead to wealth creation, consisting of mostly entitlements, interest on the debt, and national defense. At best, maybe two or three pennies on the dollar of tax revenue gets spent on job creation. On the other hand, the primary goal of private sector spending is growth, which results in a higher allocation of income to growth related spending. A dollar invested in a business creates more wealth than a dollar given to a Social Security recipient.

All right then, tell us what you think would have happened without the tax cut. Would we be seeing the same growth, more growth, or less growth? Would jobs have come back faster or slower? Or did it make absolutely no difference? Include any data to support your position.

No one can say with any real confidence what would have happened without the Bush tax cuts, just like no one can say with any confidence what would have happened if Clinton hadn't raised taxes in the early 90s. However, it would seem to me that after 2.5 years of stagnation, the economy would have picked up no matter what. Again though, we will never know.

You left out the best choice; grow the economy.

Like I said, I think the jury is still out on the long term benefits of taxcuts. However, there is clearly a short-term issue of balancing the budget, as we all seem to agree that taxcuts decrease revenue in the short term. And that has to be done either with spending cuts or increased borrowing.

The short answer is that the overwhelming majority of government spending does not lead to wealth creation, consisting of mostly entitlements, interest on the debt, and national defense.
....
On the other hand, the primary goal of private sector spending is growth, which results in a higher allocation of income to growth related spending.

Except that the taxcuts were aimed primarily at individuals with a few things thrown in for small businesses. Whether an individual gets a taxcut or gets social security, they have more money in their pockets that they will presumably spend or possibly save. Money that goes towards interest on the debt is ultimately paid to someone who can then spend that money (though a large part of our debt is held by foreigners). Money spent on the military is either given to soldiers who spend it to live and support their families or its spent on defense contractors who in turn employ people, do R&D, etc. The point is that government doesn't just take your money and burn it, it spends it just you or I would if it were in our own pocket. It spends it on things that we might not buy and it probably wastes more money than if we did it ourselves, but the economic benefit is still there.

However, there is clearly a short-term issue of balancing the budget, as we all seem to agree that taxcuts decrease revenue in the short term.
Nope, no agreement there. I said, "may" lead to a short term decrease. Looking at recent history, again following the link to the historical data, tax cuts haven't led to even a short term decrease in revenues. The most the data shows is a 'potential' reduction in revenue growth; not the same thing at all.

Aslo, why emphasize the short term to the detriment of the long term. If accepting a deficit for 4 years means repeaing a bigger surplus over 10 years, then that's a good investment. By the same token, a balanced budget this year that leads to reduced growth and revenues over the next 10 is a bad investment.

I don't know who's forecasts are the most accurate, but the current numbers suggest that the Bush economic plan is working as advertised, and for a lower price than projected. It remains to be seen whether it will continue to track, particularly when the cuts are made permanent, if that happens.