MULLINGS - The Disappearing Deficit

On the Road
Nashville, Tennessee


• Stay with me here. This is important.

• The fiscal year for the Federal government runs from October 1 through September 30.

• The budget deficit is the difference between the amount of money, each fiscal year, that the Federal government takes in from all sources (taxes, fees, leases, etc.) and the amount it pays out.

• The national debt is the total of all the accumulated annual deficits.

• It has been an article of faith among Conservatives that lowering tax rates increases government revenues. This was popularized by a University of Chicago professor named Arthur Laffer who, so the story goes, was having dinner one night in Washington DC and drew a diagram upon a napkin showing the effects of tax rates and tax revenues.

• This, of course, became known as the “Laffer Curve” and has sustained Republican candidates for the ensuing 30 years.

• Until I read Laffer’s description of that night, I had not known that at that 1974 dinner (in addition to an editor of the Wall Street Journal) was the White House Chief of Staff for President Ford and his deputy: Donald Rumsfeld and Dick Cheney respectively.

• Interesting, huh?

• According to Laffer, lowering tax rates works because of:

“… the positive impact that lower tax rates have on work, output, and employment -- and thereby the tax base -- by providing incentives to increase these activities.

“Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities.”

• To grossly overstate it to make the point, if you tax the profits on certain activities at 100% and other activities at zero percent, it doesn’t take a PhD in economics to understand which activity businesses will pursue.

• I made you wade through all that because the Administration, this week, released figures showing that since the 2003 tax cuts took effect, the deficit – in spite of the enormous amount spent on the war on terror, national disasters, and growing entitlements – has decreased by nearly a quarter of a TRILLION dollars.

• In fact, according to a White House release:

“In February the Federal budget deficit for 2007 was projected to be $244 billion. Today's numbers show that the budget deficit is now just $163 billion.”

• Putting aside for a moment the notion that only the US Federal government would have the chutzpah to use the word “just” ahead of a deficit number of $163 billion” this is pretty good news.

• Not only that, but the Office of Management and Budget is projecting that, if the current tax structure stays in place, the nation could be looking at its first surplus since the attacks of 9/11.

• Earlier this week, the Wall Street Journal editorialized on this subject and noted that

“federal receipts have climbed by $785 billion since the 2003 investment tax cuts, the largest four-year revenue increase in U.S. history … The overriding lesson here is that the best antidote for deficits is faster growth, not tax increases.

“The budget deficit has declined more rapidly this decade in the wake of the Bush tax cuts than it did in the 1990s in the wake of the Clinton tax increases.”

• That pesky Laffer Curve stuff again.

• The tired phrase “tax and spend Democrats” will soon be filling your mailbox from Republican candidates but, pending some new formulation of the phrase, it is the Dems in the House and Senate which will surely try to put the brakes on economic growth.

• If a Democrat occupies the White House starting in 2009, you can bet on it because the Republican tax cuts of 2001 and 2003 are scheduled to expire in 2010.

• Higher Taxes = Lower Growth. Seems so simple you could write it on a napkin.

• On the Secret Decoder Ring page today: Links to Laffer explaining his curve, the graphic showing the deficit reductions and Bloomberg.com’s explanation of it all. Also a Mullfoto from beautiful downtown Old Town, Alexandria and a Catchy Caption of the Day.

Also, on the Mullblog today is an amusing description of my brief career on my college debate team.