Saturday, July 16, 2005

Krugman Says Good News on Deficit a "Temporary Blip"

Un-Spin the Budget : "The usual suspects on the right are already declaring victory over the deficit, and proclaiming vindication for the Laffer Curve - the claim that tax cuts pay for themselves, because they have such a miraculous effect on the economy that revenue actually goes up.

But the fact is that revenue remains far lower than anyone would have predicted before the tax cuts began. In January 2001 the budget office forecast revenues of $2.57 trillion in fiscal 2005. Even with the recent increase in receipts, the actual number will be at least $400 billion less. [me: Krugman ignores impact of 9-11-01]

A close look at the tax data explains why these experts believe that we're seeing a temporary uptick in revenues, not a sustained change in the trend. Taxes that are closely tied to the number of jobs and the average wage, such as payroll taxes and income taxes automatically withheld from paychecks, aren't showing any big pickup. [me: Krugman ignores the steady growth and that employment has now reached the same level as September 2001]This confirms other data showing that the economy as a whole is, if anything, doing worse than one would expect at this stage of an economic recovery.

It turns out that all of the upside surprise in tax receipts is coming from two sources. One is tax payments from corporations, up both because last year corporate profits grew much more rapidly than the rest of the economy and because the effective tax rate on corporations went up when a temporary tax break, introduced in 2002, expired. [me: Krugman likes to think corporate profits aren't related to consumers being able to buy more goods with less personal taxes and the notion that an expired corporate tax provision in 2002 resulted in a surge of revenues last quarter 2005.]Both are one-time events

The other source of increased revenue is nonwithheld income taxes - taxes that aren't deducted from paychecks but are instead paid by people receiving additional, nonsalary income. The bounce in nonwithheld taxes probably reflects mainly capital gains on stocks and real estate, together with bonuses paid in the finance and real estate industries. [me: Krugman hates to think people are more entrepreneurial and make a lot more money to spend and invest as non-withheld taxpayers with lower tax rates; also note they do usually pay nice quarterly estimates of taxes owed, but to Krugman that means Wall Street bonuses not any economic success caused by reduced taxes]Again, this revenue boost looks like a temporary blip driven by rising stocks and the housing bubble.

In other words, we're still deep in the fiscal quagmire, with federal revenues far below what's needed to pay for federal programs. And we won't get out of that quagmire until a future president admits that the Bush tax cuts were a mistake, and must be reversed." [me: Krugman would solve every situation with taxes so burdensome the US would have unemployment at the 11.7% rate like Germany in June and France at 10.2%, and growth rates of 0.3% to 0.5% for France and Germany respectively.]
Bernard Goldberg in his book about the 100 people ruining America only has Krugman at the number 8th worst - I would rank him at least in the top 5 - and very sad he has any influence at all.

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