Budgetary Red Herring

In the last day or two, the Karl Rove treasonous has distracted attention from what the White House would like to use as cause for celebration, the reduction in the deficit for the previous quarter compared to what was expected. However, this focus on the current quarter budget deficit reduction distracts from the dire financial straits in which the U.S. finds itself after years of war and unsustainable expensive tax cuts for the very wealthy (52 percent go to the top 1% of income earners in the U.S. just in the 2001 tax cuts, not including the tax cuts that reduced the rate of capital gains and dividends, which are predominately paid by the wealthy). The problem with celebrating over the current tax revenue increase is partially the way it explained. The San Francisco Chronicle reports on July 14, 2005 that "Administration officials credited Bush's tax cuts with reducing the red ink by accelerating growth, thereby pushing up tax receipts." This clearly is the much debunked Laffer Curve argument about tax cuts and growth. There have been numerous studies that have found no link between tax rates and economic growth in the U.S. The Laffer curve argument only works when the tax rates are exceptionally high (at least 50% of income), whereas the U.S. has tax rates significantly under 35% on average, even before the tax cuts of 2001, 2002, and 2003. It is preposterous to claim that the tax cuts reduced the deficit. In fact, according to a Center on Budget and Policy Priorities report, the reduction was due to the expiration of business tax cuts (expired in 2004) and increases in capital gains and dividends in 2004 (the elimination of that tax was passed in 2002, but not fully phased in until the end of this decade). Instead, the deficit is largely the fault of the tax cuts of 2001, 2002 and 2003, as well as some planned overstatement of future deficits in years past. Furthermore, the OMB reports adjust future expected deficits in line with current reductions, even though those reductions were based upon temporary increases in revenue and do not include anticipated spending on Iraq, Afghanistan and the overall War on Terrorism.