Lower Tax Rates, Higher Revenues

The Washington Post reported today that tax receipts exceeded treasury predictions. Looks like lower taxes have increased revenues, not reduced them. Now if we can get Congress to stop spending like drunken sailors, we may yet get the deficit under control. Lawrence Kudlow looks at the numbers in his commentary.

But the real story behind the higher tax payment 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 in 2000-2002, both capital formation and economic growth have come back from the dead over the past 2 years.

Real GDP since the tax cuts has averaged 4.3% at an annual rate, whereas growth was only 2.4% in the anemic recovery preceding the tax cuts. The latest government data on tax collection for calendar 2004 confirms the tax-cut-led recovery through the explosion of high tax collections at lower tax rates. 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 creation is the backbone of this entrepreneurial recovery. Despite naysayers in the mainstream media and parts of Wall St., strong economic expansion will continue for many years.

The more money people have in their pockets, the greater confidence they will have in the economy, which will have them feel they can spend or invest some of that money and so the cycle goes. Paying down the deficit also help consumer confidence. All in all, a positive report on the state of tax revenues and economic growth. - Sailor