May 10, 2007

I Blame The Bush Tax Cuts

The Wall Street Journal yesterday noted the record tax revenues being collected by the federal government thanks to the economic growth stimulated by President Bush's tax cuts.

Here's the "surge" you aren't reading about: the continuing flood of tax revenue into the federal Treasury. Tax receipts for April were $70 billion above the same month in 2006, and April 24 marked the single biggest day of tax collections in U.S. history, at $48.7 billion, according to the latest Treasury report. ... Revenues for the first seven months of fiscal 2007 are up 11.3%, or $153 billion. This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP.

Not only are federal tax revenues surging, so are state tax revenues all across the country. According to the March 2007 State Budget Update from the National Conference of State Legislatures, 42 states "are finding themselves with unexpected revenue as they approach the end of the fiscal year."

In the current fiscal year, according to the NCSL, "Most states took in more money than officials predicted from personal income and business taxes."

Of the 41 states that levy a broad-based personal income tax, 22 reported that collections were above forecasted levels in late February. And in 26 states, corporate income and other business taxes exceeded expectations.

Much of the surplus revenue is due to what the Tennessee Department of Finance & Administration called unexpectedly strong growth in business-tax revenue, but I don't know why it was unexpected. According to data from the Tennessee Department of State, the number of active for-profit corporations in business in Tennessee at the end of 2006 - 83,428 - is almost as many as the peak of 83,888 at the end of the year 2000 at the tail end of the Clinton-era economic boom. With the nation sliding into recession as Clinton left office, the number of for-profit corporations in Tennessee declined in 2001, 2002 and 2003, but then began to rebound.

Even stronger evidence of the fast-growing business sector in Tennessee is in the fourth column of the same chart - the number of limited-liability companies (LLCs) doing business in Tennessee has more than doubled from 23,506 at the end of the Clinton administration, to 54,751 at the end of 2006:

Although I haven't looked at business incorporation and LLC data from other states recently, I suspect other states are experiencing the same thing as Tennessee. Back in 2004 I collected LLC data from about half of the states and found that LLC formation was at a record pace in most of them, evidence of a boom in the formation of new and small businesses. (Just do a search on this blog for "LLC" to find the many posts I wrote on that subject back then.)

More businesses mean more jobs, more economic activity, more people earning incomes, and more businesses and people paying taxes. Faster economic growth offsets lower tax rates. It worked for President John F. Kennedy, it worked for President Reagan and it worked for President George W. Bush.

Tennessee's $1.3 billion revenue surplus, and the record revenues flowing into Uncle Sam's coffers both are the result of the Bush Economic Boom.

Cutting Taxes Grows the Economy - It Doesn't Shrink Government
I've said it before, and I'll say it again: conservatives who think the key to shrinking the size of the federal government is cutting taxes are always going to be disappointed. President Ronald Reagan proved that tax cuts stimulate the economy and lead to record tax revenue - and Congress proved it can spend every last dollar and then some. (The Reagan era deficits were not caused by tax cuts as revenue growth soared, but instead were caused by Congress passing budgets that spent even more.)

Tax cuts don't shrink government - unless you slash tax rates close to zero - because, as per the Laffer Curve, lower taxes=higher economic growth=higher revenue.

If the liberal Big Government lovers understood that, they'd work with conservatives to keep taxes low at all levels of government, and they'd find themselves with plenty of money to spend on all those things that liberal politicians can't seem to get enough of.

And if conservative Big Government loathers understood that, they'd work to keep taxes low, but instead of calculating the size of government based on the size of the federal budget they would focus their "Small Government" agenda on shrinking the power of the government to intrude on and regulate what ought to be private, personal, family, religious, business and local-community matters.