A huge point has been virtually if not totally ignored since the announcement on Friday that the reported federal deficit for the fiscal year that ended a week ago was $250 billion -- The Bush Administration has done what it said it would do about the deficit three years ago, and has done it a full three years early, i.e., in half the time predicted.
This continues what has been a very difficult past few years have been for those who deride supply-side economics. If Washington, with a little help from the states, lets the supply-side engine continue to chug along for next several years, the results could be so positively stunning that it would become impossible for supply-side detractors in touch with any part of the real world to hang on to the comfort of their static-analysis fantasyland.
But first, let's recap what has happened in the past three fiscal years:
- Tax receipts have soared by over 35% (with 5.5%, 14.5%, and 11.7% increases in fiscal 2004, 2005, and 2006, respectively) from $1.78 trillion to $2.41 trillion (2004 and 2005 results can be found at Page 2 of this PDF from the Congressional Budget Office [CBO]; 2006's receipts were estimated by adding the $253 billion revenue increase reported near the end of this longer story).
- Despite the costs of the Iraq War, the rest of the War on Terror, Katrina relief, and not nearly enough control over other spending, the administration has accomplished its goal of cutting the reported deficit in half by the time it leaves office a full three years early (fiscal 2009, which ends a little less than three years from now, is the last budget over which the Bush Administration will have responsibility). Andrew Taylor of the Associated Press reported on the deficit yesterday (commented on here) but "somehow" missed this little nugget of good news, even though he reported on the administration's original fiscal 2004 promise in a "not going to happen" manner just under a year ago on October 14, 2005 (last two paragraphs at link) --
The White House has set a goal of cutting the deficit in half from the $521 billion prediction for 2004 that it issued at the beginning of that year. (the original goal was therefore set sometime before October 1, 2003, the beginning of the 2004 fiscal year -- Ed.)
The administration says it is still on track to reach that $260 billion goal by the time Bush leaves office. But administration budget projections leave out the long-term costs of occupying Iraq and Afghanistan, and have yet to be updated with cost estimates of hurricane relief.
Even with all of those costs included, the administration has reached its goal. How 'bout that, Andrew?
- Economic growth has averaged an annualized 3.89% during the past 13 quarters since the 2003 Bush tax cuts were passed. This is a record that for all practical purposes matches the best seven years of the Clinton administration, but trails the best seven years of the Reagan-Bush 41 and Kennedy Johnson eras, when more aggressive tax cuts were enacted:
This is all very nice. But it could get better -- much, much better. So much better that it's scary to even contemplate the possibilities, because if the ruling class in Washington thinks it might really happen, they'll probably figure out how to ruin it.
For starters, understand that I have been using the term "reported federal deficit" for a reason. The TRUE federal deficit is much higher. That's because for decades federal budgetmakers have reduced the true deficit by the amount by which Social Security tax collections have exceeded Social Security benefits, and have "borrowed" that money from the Social Security "Trust Fund" -- even though the "Trust Fund" should be holding and investing those funds to help cover future benefit payments.
Here, pending what I assume will be very minor revisions, is how fiscal 2006 really turned out, in billions; the $179 billion listed as "Social Security surplus" actually consists of a $177 billion Social Security surplus and $2 billion in positive cash flow from the US Post Office; both were estimated by the Congressional Budget Office (CBO) in its August 17 Budget Update Report (large PDF document; information is at Page 12):
All of this is important to understanding the following tantalizing possibilities:
- If federal tax receipts continue to increase at just 9% per year, which is only about 70% of the 13.1% average annual increase in the past two fiscal years, and if federal spending and the Social Security surpluses in future years turn out as the CBO predicts in the Budget Report noted above, the last Bush budget in fiscal 2009 will show a reported surplus.
- If federal tax receipts continue to increase at 9% per year, and if federal spending and the Social Security surpluses continue to turn out as the CBO predicts, it will be fiscal nirvana -- a honest-to-goodness REAL budget surplus will occur in fiscal 2011, less than five years from now.
Here's is how it will look if the described assumptions hold up:
So, will these hoped-for serendipitous events take place? Well, there are certainly a lot of barriers. Here are what I believe to be the biggest four:
- First, the CBO is assuming increases in projected outlays of just over 5% per year; unfortunately, the average increase during the past 5 years has been just under 7%. It's not like 5% can't be done; the average increase in outlays during the first five years of GOP control of Congress (1995-1999) was only 3.8%. The question is whether there is anything even resembling resolve in Congress to keep spending under control.
- Next, the 9% revenue increases, though less than those of the past couple of fiscal years, still depend on two things that haven't yet happened. First, the tax structure enacted with the Bush tax cuts of 2003 only extends out to 2010. There is absolutely no chance that the hoped-for revenue increases will materialize unless that tax structure is made permanent, or at least extended by a minimum of five more years. Make no mistake: The economy and the markets will treat a failure in this area for what it would really be -- a massive growth-stalling tax increase that would drastically reduce the rate of growth in tax receipts, possibly below zero.
- The other thing that mostly hasn't happened yet is fiscal control in the various states. Most of them, thanks to the very federal tax cuts that some governors and so many Blue Staters deride, are awash in revenue. Unfortunately, as has so frequently occurred in the past, most states are simply spending the extra money instead of taking the opportunity to enact their own economy-stimulating tax cuts. The states need to do their part to keep the economic engine running. Ohio (of all states) actually came through on this front with an income-tax reduction a few months ago, but needs to do much more.
- Finally and most ideally, the top federal rate should come down further from its current 35%. In 1986, when the first wave of Reagan tax cuts started losing steam, it took another cut of the top federal rate to 28% to get the annual pecentage increase in collections back into double digits again. It's likely that a cut in the top federal rate to that same 28% level would accomplish an identical result; it would certainly make the 9% revenue-increase assumption more likely to come true, and it could even lead to a level of economic growth closer to that achieved during the Reagan-Bush 41 and Kennedy-Johnson years.
As has been shown time and time again, suppy-side tax cuts work when they are allowed to do their magic.
Let's keep the magic going, shall we?
Cross-posted at BizzyBlog.com.
