ECONOMICS: The Latter Curve Strikes Again
Moore, Stephen
ECONOMICS Stephen Moore The Laffer Curve Strikes Again The Bush tax cuts create new wealth and greater tax revenue. ~"-N JANUARY 2003 George W. Bush's presidency was in a rut. The first round...
...I told him, 'Well, Mr...
...H AS THIS STOCK MARKET and economic recovery only enriched gold cuff-linked CEOs who are callously exporting jobs overseas, while shafting the middle class assembly line worker, truck driver, or schoolteacher...
...That's when Mr...
...In the first six months of the tax cut, the Dow Jones rose from 8,600 to just over 10,000...
...An even bigger mystery is why Congress, despite this inarguable vindication of the Laffer Curve and the Bush tax policies, has not acted to lock in these tax changes permanently and irrevocably...
...This was the precise opposite of what many in the Republican Party and most liberal Democrats and their think-tank gurus were recommending...
...The biggest single year gain...
...Corporate income tax receipts have exploded like a cap let off a geyser, up by 40 percent in the three years since the tax cut...
...These higher stock prices represented $1.5 trillion in wealth regeneration...
...Instead, the deficit is rapidly disappearing...
...Bush didn't get his full dividend tax cut, with the help of Rep...
...As former Federal Reserve Board member Wayne Angell, put it: "The economy isn't going to recover until the stock market does...
...Profit gains by corporate America are one reason corporate tax revenues have soared...
...Yes, the ideas of the Laffer Curve still elude the left...
...But considering that stock prices are so much higher since the tax cuts, the burden of proof is on the skeptics...
...Many of President Bush's critics foolishly predicted that states and localities would be victims of the Bush tax cut gamble...
...By increasing the rate of return on investment, businesses would start spending again, stocks would start to regain value, and employers would begin hiring again...
...Just how good a number is this...
...As the chart below shows, the long-term trend of rising stock values was triggered by Ronald Reagan's historic tax cuts, which reduced the cost of capital and snapped the markets out of a prolonged period of malaise...
...Harold Meyerson of the Washington Post recently wrote that "the income tax cuts to most middle class families don't exceed a couple of hundred dollars...
...The estimates of this effect ranged from 6 to 12 percent gains in stock values...
...That certainly comports with common sense: when workers produce more, employers can afford to pay them more...
...Moreover, the combined impact of the Bush tax cuts has been to make the tax system more progressive...
...Bush officially became a supply-side president...
...As his newly appointed Treasury Secretary John Snow later told me: "Mr...
...A small band of old Reaganite supply-side tax cutters including Arthur Laffer, Larry Kudlow, Brian Wesbury, David Malpass, Richard Rahn, and myself came to the White House to sell the President on a new tax cut strategy...
...But the economy and stock market did instantly react...
...about our "destructive and destabilizing deficits...
...Shortly after that series of white House meet44 THE AMERICAN SPECTATOR SEPTEMBER 2006 ings, Mr...
...A tax cut for investment would only lead to more saving, not more spending, they argued-thus making the recession worse...
...In other words, the Democrats have declared themselves against the Bush tax cuts always and everywhere-and damn the evidence...
...Perhaps the most remarkable story comes from the two coasts: New York City and California...
...The liberal deep thinkers wanted more money for states and localities--dollars that these entities would be sure to spend...
...We produce more goods with less labor, which is the very definition of economic progress...
...Alas, the Bush tax cuts haven't solved one major economic problem still confronting the nation: runaway spending...
...w Stephen Moore is senior economics writer for the Wall Street Journal editorialpage...
...Over the past four years manufacturing productivity has increased by the largest amount ever in such a stretch of time...
...Nonetheless, even the New York Times recently acknowledged in a front page story that tax revenues are exploding, and described the increase as a "mystery...
...The biggest gains in tax receipts have come from capital ains and dividend tax payments...
...The idea was to aim tax cuts at helping revive the stock market and reverse the capital investment drought that was now entering its third year...
...Many supply-side economists who cut their teeth in the Reagan era-such as Laffer, Kudlow, and John Rutledge--publicly predicted that these tax cuts would have an immediate stimulus effect on the stock market...
...One of those economists who predicted this market rally in response to the tax cuts was Donald Luskin of TrendMacrolytics...
...FY2005...
...He endorsed a full repeal of the dividend tax, arguing that it was an unfair double tax on investment income...
...John Edwards complained during the 2004 presidential campaign: one America for the super rich like Donald Trump and the other for the middle class and poor who are falling behind...
...Just as supply-side economic theory predicted, lower tax rates have incentivized wealth-creating activities in the business sector...
...Perhaps not, but we now have another chapter of the supply-side experiment in America-added to the Coolidge, Kennedy, and Reagan experiences-that tells us that lowering the tax rate hurdles of high taxes leads to prosperity and wealth gains, not just for the rich and famous but the tens of millions in the middle and lower classes that are striving to get there...
...Although Mr...
...Has George Bush created "two Americas," as Sen...
...As Luskin puts it: "Cause and effect relationships are nearly impossible to conclusively prove when stock prices are involved...
...Reductions in marginal tax rates are generally associated with market rallies...
...See "We Are All Post-Reaganites Now," TAS, April 2006...
...Other areas of the economy have rebounded smartly in the wake of the Bush investment tax cuts...
...The New York Times editorial page, by contrast, wrote that the Bush tax plan would surely not provide an "immediate stimulus for the economy...
...And these were precisely the tax rates that were cut the most severely...
...Well, not exactly...
...year the Department of Labor quietly reported that labor productivity in 2005 was up 5 percent in real terms...
...But the Times did note that the biggest payment increases have been from the richest 10 percent of taxpayers who pay the bulk of American income taxes...
...In 2005 and 2006, according to government numbers released in July, federal revenues have increased by more than $520 billion...
...One wonders if God were to inscribe on stone tablets carried down from Mount Sinai a loud and clear message, "THE BUSH TAX CUTS WORKED," whether this could change minds or hearts on Capitol Hill...
...Bush revived his presidency...
...We are satisfied we were right-because it happened...
...Both were in debt up to their eyebrows, but are now running multi-billion dollar surpluses for the first time that anyone can remember...
...Thanks to these productivity levels, combined with tight labor markets as reflected in an unemployment rate that is below 5 percent, real compensation to workers is up 7 percent since 2001, with the biggest gain this year...
...CBO actual and latest prediction January 2006...
...Meanwhile, the rich got enough to purchase another yacht, or so the story goes...
...SEPTEM~IR 2006 THE AMERICAN SPECTATOR 47...
...As the chart also shows, the Bush tax cuts snapped the markets out of their post-bubble hangover, and put them back on track...
...That is the largest real increase in tax revenues over a two-year period in American history...
...It is surely no coincidence that the economy pivoted into recovery almost on a dime the very day, May 28, that the 2003 Bush tax cut--particularly the reduction in the capital gains, dividend, and income tax rates-was signed into law...
...T HE MOST REMAtlKABLE CHAPTER o f t h i s supplyside experiment has been the tax revenue explosion...
...The Congressional Budget Office reports that federal expenditures increased by 7 percent per year for the past four years, as the congressional Republican spending spree rolls on...
...Well, DOL has only been measuring productivity rates since the late 1950s...
...Bush's tax cuts, we were told, would blow a $2 trillion hole in the ten-year deficit...
...Also, late last Although the manufacturing workforce is shrinking in America, the amount of production is rising...
...The 2006 deficit will be down to below $300 billion, according to the latest reports, and when adding the massive surpluses of state and local governments, thanks to the economy's jack rabbit growth, government borrowing as a share of GDP will be somewhere near 2 percent...
...We produce more goods with less labor, which is the very definition of economic progress...
...The often maligned manufacturing sector is leading the way...
...That's well below the average for the industrialized countries that lecture the U.S...
...The after-tax rate of return rises and that should be capitalized immediately into higher stock prices...
...bins...
...The NASDAQ, which had been creamed by the tech implosion, rose from its low of 1,520 in May 2003 to 1,950 by early 2004, a gain of more than 30 percent...
...This is unquestionably an investment recession that can't be solved through traditional Keynesian stimulus...
...OW FOR THE BEST PART OF THE STORY...
...President, my economics training always told me that the capital should be taxed just once, not one and a half times.'" Good advice that the White House embraced...
...How could Bush have cut taxes for the wealthy if their taxes have surged...
...Thanks to continuing gains in the stock market combined with a surging housing market, the net worth of American households has increased by some $6 trillion since May 2003...
...Bush ran for re-election on the theme of making the lower tax rates permanent fixtures of the tax code, but the best Congress could do thanks to overwhelming opposition from the Democrats was to extend the tax cuts from 2008 to 2010...
...Bill Thomas (R-CA), the wily House Ways and Means Committee chairman, the dividend tax was cut to 15 percent and the capital gains tax also cut to that rate...
...The median household has increased its wealth by almost $20,000 in real terms since the supply-side tax cuts took effect...
...These gains matter for workers because labor productivity gains are about 95 percent correlated with increases in wages and compensation, according to former Reagan administration economist Gary RobLower Tax Rates, More Revenues (Copitol Gains Revenues in billions $) Year Expected* Actual** 2003 42 51 2004 46 71 2005 52 80 2006 57 82 "CBO prediction in January 2004...
...Observing this data, Larry Kudlow of CNBC recently declared that the Bush tax cuts "are the greatest vindication of the power of the Laffer Curve in American history...
...As Laffer put it: "If you cut the tax rate on stocks, they become more valuable...
...This means that although the manufacturing workforce is shrinking in America, the amount of production is rising...
...Business investment and profits have surged since 2003...
...The Treasury Department reports that federal tax receipts were up 12 percent in the first nine months of the 2006 fiscal year, which was the second largest gain in revenues in 25 years...
...Yet this same paper, and its columnists like Paul Krugman, whine almost weekly about the unfairness of Bush's tax cuts for the super-wealthy...
...The answer to this is a genuine mystery--well beyond my pay grade...
...The 2005 gain was the highest single-year increase ever recorded...
...The first round of Keynesian tax cuts enacted in 2001 had put dollars into consumers' pockets but had failed to pump much juice into a still moribund econ,.._omy...
...Democrats condemn the Bush tax cuts as tilted toward the rich, but even after the cuts, the top 1 percent paid about double the income tax that the bottom 80 percent did, despite the latter's having triple the income...
...The latest data from the Congressional Bud46 THE AMERICAN SPECTATOR SEPTE@BER 2006 STEPHEN MOORE get Office finds a 70 percent increase in capital gains receipts and 31 percent hike in dividend tax payments since 2003...
...Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts...
...As a result of the Bush tax cuts, the typical famiI $ 0 ',.D H i 8[ x _9 c _9 o u i SEPTEMBER 2006 THE AMERICAN SPECTATOR 45 ECONOMICS ly of four with an income of $40,000 a year, has seen its tax liability shrink by $1,000 a year, thanks to reductions in the lowest tax rate and an increase in the child credit...
...The Clinton-era budget surpluses had quickly morphed into $400 billion of red ink...
...They wanted more Keynesian consumption-oriented sugar injections to get Americans buying again...
...The $7 trillion losses in household finances from the popping of the Clinton-era tech bubble had still not been recaptured...
...This tsunami of revenues contradicts flatly the left's predictions of fiscal doom...
...Virtually all of the wealth losses from the end of the Clinton era have been recaptured...
...Real GDP grew by STEPHEN MOORE just under 6 percent in the second half of 2003...
...Bush asked me if we should go for a 50 percent cut in the dividend tax or total repeal...
Vol. 39 • September 2006 • No. 7
