The Incredible Shrinking Deficit

In spite of (or perhaps because of) lower marginal tax rates on income and investments, federal revenues are up and the deficit continues to shrink.

For the first eight months of this fiscal year, the government ran a deficit of $272 billion. That's down from the $346 billion deficit for the same months in fiscal 2004. Receipts were up 15 percent from last year.

While that revenue surprise won't cure the nation's overspending problem, it has set off a flurry of budget speculation. A number of economists are lowering substantially their estimates for this year's deficit. Ed McKelvey, an economist with Goldman Sachs, for example, revised his forecast of the fiscal 2005 deficit to $350 billion, down from $412 billion. Some hope, perhaps unjustifiably, that the deficit will continue to shrink...

Perhaps the most interesting speculation [about the source of the new revenue] revolves around whether long-term effects of tax cuts are beginning to kick in. Many supply-side enthusiasts certainly believe they are. The new tax revenue numbers are "an eye-popping vindication of the Laffer Curve and the Bush tax cut's real economic value," wrote a Wall Street Journal editorial writer.

The Laffer Curve, named after Arthur Laffer, a White House economic adviser during the Reagan administration, is getting renewed attention. Briefly, it says that the tax on the last dollars earned - the so-called marginal tax rate - has a huge impact on individual effort and enterprise. So, the theory goes, substantial cuts in the marginal tax rate will generate lots of new business and, thus, boost tax revenues. An extreme version of supply-side theory says the gain in revenues could fully offset the revenues lost from the tax cut.

Now, if we only had a fiscally responsible party in Washington that would hold the line on spending, we might be in business. Anyone know where we can find one of those?

Hat tip: Justin at Southern Appeal via Real Clear Politics.