Saturday, June 18, 2005

Tax cuts and the economy

Allister Heath writing in The Scotsman:
IT IS one of the big, untold stories of the global economy. America's public finances are improving at last, to the great relief of the White House but to the puzzlement of much of the commentariat, which cannot fathom how tax cuts can possibly go hand in hand with a smaller budget deficit.

The US budget shortfall fell to $35.3bn (£19.4bn) in May, down 43.5% on the $62.5bn seen during the same month last year, thanks to a continuing surge in tax revenues. This year's deficit was the smallest May shortfall since the $27.9bn seen in May 2001, which was also the last year the government ran a budget surplus. This is a much better outcome than almost anybody was forecasting; it follows a series of US tax relief packages between 2001 and 2003, making the lower deficit all the more surprising to most analysts.

This apparent paradox has a simple explanation: President Bush's 2003 tax cuts played an important role in boosting economic growth and share prices; in turn, this triggered an explosion in tax receipts which is now compensating for the revenue lost originally. Of course, there are other reasons why the US economy has bounced back, including the strong international recovery and normal cyclical effects. But there is no doubt that the tax cuts helped a great deal.
Heath continues by ripping Bush and Congress for not stemming spending. Go read it.