Laffer’s Triumph

A Wall Street Journal editorial from today points out that despite the Democrats’ dire predictions about the effects of the 2003 tax cuts, the cuts managed to out perform everyone’s expectations. The inflow of tax revenue resulting from the cuts was $89 billion higher than expected in 2005 and is projected to be $123 billion higher than expected for 2006. This is a result of the 4 percent average growth rate the economy has experienced in the 12 quarters following the cuts.

The Dems can no longer play the "fiscal doom" card, but they haven’t stopped clamoring about the tax cuts being aimed primarily at helping the rich. While they would have us believe that a near-perfect correlation exists between tax rates and taxes paid–that a lower tax rate means less taxes paid–the evidence shows otherwise. The cuts in corporate gains and dividends tax rates, coupled with the income rate cuts, increased income for many wealthy Americans and large corporations, allowing the government to extract more revenue than before. In fact, in the wake of the 2003 cuts on cap gains and dividends, the IRS reported a 79 percent increase in cap gains tax receipts and a 35 percent increase in dividends receipts.

Some Democrats have enough sense to concede that the tax cuts were not simply a huge gift to the rich, but even they deny that the cuts benefit the lower and middle classes. What they fail to realize is that cutting taxes is not a zero-sum game–the proverbial economic pie is not static. The increased revenues lead to more savings and investment, which translates into more growth and a bigger piece of the pie for everyone. Art Laffer couldn’t have predicted it any better.