According to the Treasury department, the U.S. government took in a single-day record $61 billion in tax receipts on June 15. This surpassed the previous single-day high of $56 billion set on December 15, 2000. The recent surge in tax revenues is not just a one-day event. Fiscal year to date, total government receipts are up 15.5 percent, the fastest rate of increase on a comparable FYTD basis since 1981. The difference between the growth rate of tax revenues and the growth rate of government spending has widened to 8.4-percentage points, the largest since late 2000 when the budget was in surplus.
Not surprisingly, the recent tidal wave of tax receipts has ignited a furious debate about whether or not the Bush tax cuts are responsible for stimulating economic activity enough to actually boost overall tax-revenue collections. Classical economists refer to this as the Laffer curve, or the revenue-reflow, effect. In simple terms, if a tax cut stimulates the underlying activity being taxed, a revenue reflow will result. The reflow can offset or even surpass the volume of revenues that would have been collected under the higher tax rate and smaller tax base. Pro-growth tax-rate reductions on labor and capital in the 1920s, 1960s, 1980s, and then again in 1997 and 2003 all exhibited revenue-reflow effects, although some were stronger than others.
Despite the avalanche of historical evidence, some economists and policymakers question the validity of incentive-based revenue reflows and assert instead that the recent surge in tax-receipt growth has been caused by an increasing fraction of the workforce being ensnarled by the alternative minimum tax (AMT). They also argue that annual comparisons were made extremely easy due to the huge drop in revenues due to the 2000-02 stock market implosion and the 2001 recession that accompanied it. While there is some truth to these claims, they overlook several key facts.
The AMT, an increasing problem in its own right, does not explain the 45.2 percent fiscal year to date surge in corporate tax revenues and the 35 percent jump in non-withheld (i.e., capital gains) receipts. Fiscal year to date, corporate tax revenues are growing at 4.6-times the average rate of increase going back two decades. Moreover, rising profits and personal incomes, combined with the boom in housing, are increasing state and local tax revenues dramatically. According to the Nelson A. Rockefeller Institute of Government, state collections in the January-March quarter were up 11.7 percent, the strongest year-on-year growth for the comparable period since at least 1991. In other words, a broad rebound in economic activity, business profits, and asset prices has boosted the tax base and lifted revenues at all levels of government.
Monday, June 27, 2005
Posted by David MacLean at 4:09 PM
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