Contrary to popular belief, the federal budget deficit is not out of control — yet. And to the extent it is projected to spiral out of control in the coming decades, it is because of a projected explosion in federal spending, not any deficiency of federal revenue.
Right now, the federal government is raking in the money. Just last week, the Treasury Department reported that total revenue in fiscal year 2005 is up $275 billion, a 14.6 percent increase over 2004.
During a period when inflation has averaged just over 3 percent, federal revenue went up 14.6 percent!
Even more important, of that $275 billion in new federal revenue, a full $207 billion came from higher income tax revenue.
Why is that important? Because for the past several years the Bush administration has cut income tax rates in various ways — through eliminating the estate tax, cutting taxes on dividend income and reducing the marriage penalty. And, despite those tax cuts, federal income-tax revenue rose — substantially.
The reason the Bush administration (and supply-siders in general) argues in favor of cutting taxes on work, saving and investment is the belief that low taxes generate faster economic growth, which in turn will raise revenues.
The statistics cited above, as well as the entire economic experience in the United States over the past 25 years, proves that the supply-side assumption is true.
Even the patron saint of liberal economists and politicians, John Maynard Keynes, argued that as a general rule tax rates should not exceed 25 percent (the current top marginal tax rate on income is about 45-50 percent when the full panoply of state, local and federal taxes is taken into account).
But tax cuts alone will be insufficient to keep the deficit from exploding if Congress does not immediately put in place the mechanisms to slow the growth of federal spending to something approaching the annual growth rate of the economy.