Tax Cuts : Yes or No? I'm Confused!

Who should I believe? I’m so confused!

[Telegraph.co.uk] According to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve, a ballooning budget deficit and a pensions and welfare time bomb could send the economic superpower into insolvency.

Prof. Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy."

Does the United States fit this bill?

Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.

The figure is massive because President George W. Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.

"This figure is more than five times US GDP and almost twice the size of national wealth,” says Prof. Kotlikoff. “One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143%."

And yet…

[National Review Online] Thomas E. Nugent, Contributing Editor for National Review Online, says the supply-side Bush tax cuts of 2003 worked and that the lower tax rates have led to bulging tax revenues. [Consider:]

In the first nine months of fiscal 2006, tax revenues have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office recently noted, ‘That increase represents the second-highest rate of growth for that nine-month period in the past 25 years’ — exceeded only by the year before. For all of fiscal 2005, revenues rose by $274 billion, or 15%. – Wall Street Journal editorial

The main reason [for the increased tax revenues] is a big spike in corporate tax receipts, which have nearly tripled since 2003, as well as what appears to be a big rise in individual taxes on stock market profits and executive bonuses. – New York Times

Nugent says the Laffer Curve, and the notion that if you tax something less you get more of it, is working. To avoid a backward turning of this ongoing recovery, he says, Republicans should use the Laffer Curve as the basis for proposing another reduction in personal tax rates.

Does cutting tax rates make economic sense, or does it simply add to the ballooning budget deficit? Is this Laffer Curve real, or just more Republican BS to justify tax cuts to the wealthy?