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Setting aside the bullshit about the deficit (which I'll be happy to address later if you'd like).

A quick point:

The recovery in tax revenues, I think, results partly from some of the more minor tax cuts expiring.  (See Krugman columns over the last two years for explanations that are better than anything I can cough up.)  I also suspect that corporate tax revenues rising as something to do with earnings from overseas and imports.  I question the words "inflation-adjusted," as well, because the WSJ has this strange tendency towards "Let's not and say we did" in its articles.

Now I'm a believer in the idea that a Laffer Curve -- a ridiculous name by the way -- exists, but also that we tax to the left of optimization.  The Laffer Curve has been understood for centuries, if not longer.  You can trace it back, at the very latest, to Islamic scholars in the Dark Ages.  Keynesians working for JFK were already implementing supply-side economics ten years before Laffer wrote his big papers.

But enough of all of that.  Here's the idea I really want to dig into, so think about this (and bear in mind that this is merely a theory of mine thought up in the process of about five minutes, so be nice):

GDP = C+I+G+NX

It is necessarily the case that, in order for tax revenues to be higher at a lower level of taxation, the economy must grow at faster rates, right?  Maybe not.  At least not in the short run.  The Journal says revenues rose by -- what? -- 76% over two years?  The economy certainly has not grown by 76% since 2004.

Taking all that, let's think about the accounting: If you borrow a ton of money from abroad, and then spend it on goods and services in the domestic economy, it should be the case that the trade deficit widens, earnings rise, but that GDP growth will not change much.  Remember, you have to deduct exports from GDP.

In other words, this, to me, sounds like an accounting gimmick rather than a genuine Lafferian change in behavior.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 07:46:48 AM EST
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