Laffing At You, Not With You

LAFFING AT YOU, NOT WITH YOU….President Bush and his conservative enablers have been gleeful about the news that tax revenues are higher than the White House projected back in February. As Thomas Nugent puts it, “The supply-side Bush tax cuts of 2003 worked. The Laffer curve, and the notion that if you tax something less you get more of it, also worked. Hurrah!”

Indeed. But Greg Ip and Deborah Solomon point out something a bit peculiar today in the Wall Street Journal. (The news pages, that is. You won’t find this on the editorial page.) Here’s the conundrum: if tax revenues are 5% higher than projected thanks to the economy-boosting magic of tax cuts, shouldn’t the economy itself be larger than projected too? But it’s not. Economic growth is only 0.1% higher than projected six months ago.

So what happened? If the economy is growing at the expected rate, where’s all the extra tax money coming from?

What has changed isn’t the size of the economy, but how the economic pie is divided. The share of national income going to corporations and the wealthiest individuals, already large, has expanded, while the share going to typical wage earners has shrunk. Because corporations and the wealthy generally pay income tax at higher rates than does the typical wage earner, that shift benefits the federal Treasury.

….The administration has raised its estimate of corporate profits this year by 11%, but trimmed its estimate of wage and salary income by 1%….Individual income taxes were revised up 7%, with the increase primarily from wealthier taxpayers. Payroll taxes ? for Social Security, levied only on the first $94,200 of wage income, and Medicare ? are expected to total 1% less than expected.

So, the tax windfall is another piece of evidence that income inequality in the U.S. continues to grow, which in turn may explain why the average American still gives President Bush low marks on the economy despite its overall strength.

If you pursue policies that increase income inequality, then corporations and the rich will have more money. If the rich have more money, they’ll pay more taxes. And since tax rates are progressive, that means tax revenue will be higher than you’d expect if you based your estimates solely on the overall rate of economic growth.

Could this explain why “the average American” is not ecstatic over this month’s alleged vindication of the Laffer Curve? Namely that “the average American” is actually worse off than before even though the overall economy is growing nicely? I think it could!