That voodoo that they do
When last we left the Bush economic team and its defenders, they were predicting that tax cuts wouldn't cause revenue to drop very much at all. The naysayers, they insisted, were just a bunch of Keynesian liberals who failed to grasp the power of tax cuts to unleash the dynamism of investors and entrepreneurs.
Since then, revenues didn't just fall, they utterly collapsed. In 2003, income tax revenues as a share of the economy fell to their lowest point since before World War II -- when, needless to say, the government was a lot smaller.
The Bushies have had almost nothing to say about this inconvenient fact, until this month, when tax revenues began rising again. Now, they suddenly want to bring the topic of revenues back up. White House budget director Josh Bolten gloated, "We got to this point largely because of the president's pro-growth policies, especially tax relief."
And the Wall Street Journal's Stephen Moore asserted in a column last month that the rising revenue has vindicated supply-side economics. Moore's column was so overflowing in its enthusiasm that it described rising revenues with terms like "surged," "eye-popping," "unexpected gush" and "exploded like a cap let off a geyser," suggesting that he has either been profoundly influenced by the literary style of e-mail spam or is harboring some deep-rooted sexual frustration.
So, are the supply-siders right? Of course not.
First, the rise in revenues mainly reflects temporary factors. Economic growth is nothing special at this point in a business cycle, and revenue from individual income tax withholdings -- that is, regular wages -- are actually growing very slowly. As Mark Zandi of economy.com has noted, the primary factor is the red-hot housing market, which is causing capital gains, as well as bonuses for brokers and underwriters, to skyrocket. A second factor is the hot stock market from 2004, which is already cooling. On top of that, a provision in a 2004 tax bill encouraged corporations to bring home overseas profits right away, causing them to pay more in taxes in 2005 but less in subsequent years.
The upshot of all this is that a bunch of short-term factors have come together to cause revenues to shoot up this year. It has nothing to do with President Bush's "pro-growth" tax cuts, unless you think the tax cuts have somehow caused the housing run-up.
