"It's just a flesh wound..."

Like the Black Knight who just had his arm sheared off in Monty Python's "Holy Grail", Paul Krugman looks at the recent news of rising government revenues from lower tax rates and arrogantly dismisses it as nothing, really. Krugman, whose Liberal perspective is challenged by these results, says that "this revenue boost looks like a temporary blip," which "probably reflects mainly capital gains on stocks and real estate, together with bonuses paid in the finance and real estate industries." M'kay.

Alan Reynolds of the Cato Institute writes about Krugman's "analysis" this morning in the Washington Times:

Mr. Krugman's theory that executive bonuses in finance and real estate could account for much of the $66 billion is politically correct but mathematically impossible. Top executives in the top financial firms received average bonuses of $2 million a year in 2004, according to Mercer consulting. But only the increase in such bonuses could account for increased tax collections. Even if 100 executives received an extra $300,000 apiece, that would lift the nation's taxable income by only $30 million. And a 35 percent tax on that sum would amount to only $10.5 million, which can't begin to explain a $66 billion revenue gain.

Lacking any explanations, Mr. Krugman gets personal. "The usual suspects on the right," he writes, "are already declaring victory over the deficit, and proclaiming vindication for the Laffer Curve -- the claim that tax cuts pay for themselves because they have such a miraculous effect on the economy."

I have not declared victory over the deficit because doing so would amount to declaring I'm content that federal spending has grown from 18.4 percent of GDP in 2000 to 20.2 percent, accounting for 69 percent of the deficit.

Meanwhile, revenues are already back up to at least 17.4 percent of GDP -- virtually the same as the 17.6 percent figure in 1993, after President Clinton greatly increased tax rates on upper incomes, gasoline and Social Security benefits.

Liberal economists like Paul Krugman desperately try to find ways to explain away the proof of supply-side theory and the Laffer curve now matter how many times it's proven right. To admit that lower tax rates encourage investment and economic growth thereby leading to higher tax receipts blows away their whole Keynesian philosophy of big government = economic growth. And it would awaken them from the dream of a socialist fantasyland that exists only in their own minds.

Posted by: Gary at 08:46 AM | No Comments | Add Comment
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