Tuesday, August 03, 2010

Laffer vs. Zakariah: Who’s Right?

Roger Kimball:
When the subject turns to taxes and politicians and pundits start talking about “fairness” you can be sure that is foreplay for policies that penalize success. The punitive aspect is essential. Which is why pointing out that raising taxes on productive citizens will decrease revenues and threaten to prolong the recession cuts no ice with egalitarians. For them, the really attractive thing about raising taxes is not that it helps the poor (which it doesn’t) but that it hurts society’s producers, a.k.a. “the rich” (most of whom of course, are not rich, i.e., not in a position to spend $2 million on their daughter’s wedding: no, you have to labor long and hard as a public servant in the Democratic party to afford that sort of extravagance).

The truly amazing thing is that someone wants to argue that the Bush tax cuts, enacted in 2001, are the cause of the deficit. From 2002-2008, federal tax revenues rose at an annualized rate of ~5.2%.

That's right. The federal government, after the passage of those draconian Bush tax cuts, source, according to some, of all evil, saw its revenues rise at over 5.2% per year. So, if the federal revenues were rising that way (which is very close to US GDP over that same period, which rose about ~5.3% per year) how did the deficit get out of control? Spending! Federal spending, over that same period, rose by approximately 6.6% per year. There are two sides to the deficit equation, inflow and outlay. If inflows are increasing at 5% annualized rate, you've got to be pretty profligate to run a massive deficit.1

And we'll leave the last word to Wilkins Micawber, who understood this.
Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

1 - We saw this exact same dynamic play out with the Reagan tax cuts of the 80s. Democrats wailed about starving children, federal revenues rose significantly with the economic expansion, spending rose faster, and the tax cuts were blamed for the deficits...

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