The Laffer Curve in action

Disappearing Deficit

Why is it that the dreaded federal budget deficit only commands screaming headlines when it's rising, not falling? And why is it that the deficit is portrayed as a fire-breathing, hydra-headed monster only when the press can portray the villain as "irresponsible tax cuts," not runaway federal spending?

We ask these questions in the wake of the great unreported fiscal story of 2005: the shrinking federal deficit. It's down by at least $100 billion because federal tax receipts have skyrocketed this year by 14.6% (or $204 billion) through June. Private economic forecasters now believe the budget deficit may come in at about 2.5% of GDP, which is in line with the historical average for the past 40 years. Given that we're fighting an expensive, must-win war on terror, these deficit numbers aren't too shabby.

Not even the most unbridled supply-sider predicted that President Bush's investment tax cuts would unleash such a spurt of tax receipts this year. But thanks to sustained economic growth, more Americans working and improved business profits, individual income tax receipts have shot up by 17.6%. Even more astonishing is the nearly 41% spike in corporate revenues. There's a fiscal lesson here that bears repeating: The best way to grow tax revenues is to grow the tax base, and that is what has happened this year.

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Apparently, T^x was on the right side of the curve in 2003 ...

Somewhere, Paul Krugman kicks a cat ...