On October 18, 2004, Larry Kudlow wrote an editorial in the National Review Online titled "And the Budget Says . . .". The editorial begins:
Is there more sanity in the federal budget than people think?
The latest budget numbers closing out fiscal year 2004 show slower spending growth, stronger tax receipts, and a $413 billion deficit that came in about $100 billion less than the Office of Management and Budget predicted at the start of the year and $64 billion lower than the Congressional Budget Office estimate.
Overall, according the Treasury Department, tax receipts increased 5.5 percent in fiscal year 2004 compared to a 3.8 percent decline in fiscal year 2003. Income-tax withholdings gained 2.5 percent versus a loss of 2.2 percent in the prior year. Corporate tax collections exploded 43.7 percent on the shoulders of near-record corporate profits.
What’s going on? It’s clear: At lower marginal tax rates, the rising economy is throwing off a lot more tax revenues. Score one for the supply-siders.
No, score one for the cherry-pickers. I took a look at the year-end monthly treasury statements back to 1998 at http://www.fms.treas.gov/mts/ and http://fms.treas.gov/mts/backissues.html. The following table gives the outlays, deficits, and receipts (from individual income tax, corporation income tax, and total):
RECEIPTS, OUTLAYS, AND DEFICITS (billions of dollars)
Classification 1997 1998 1999 2000 2001 2002 2003 2004
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Individual income tax 737.5 828.6 879.5 1004.5 994.3 858.3 793.7 809.0
Corporation income tax 182.3 188.7 184.7 207.3 151.1 148.0 131.8 189.4
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Total Receipts 1579.0 1721.5 1827.3 2025.1 1991.0 1853.2 1782.1 1879.8
Total outlays 1600.9 1652.2 1702.9 1788.1 1863.8 2011.0 2159.2 2292.4
Surplus or deficit (-) -22.0 69.2 124.4 236.9 127.3 -157.8 -377.1 -412.6
The following table then gives the percent changes:
RECEIPTS, OUTLAYS, AND DEFICITS (percent change)
Classification 1998 1999 2000 2001 2002 2003 2004
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Individual income tax 12.4 6.1 14.2 -1.0 -13.7 -7.5 1.9
Corporation income tax 3.5 -2.1 12.2 -27.1 -2.0 -11.0 43.7
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Total Receipts 9.0 6.1 10.8 -1.7 -6.9 -3.8 5.5
Total outlays 3.2 3.1 5.0 4.2 7.9 7.4 6.2
Surplus or deficit (-) -415.4 79.6 90.5 -46.3 -224.0 139.0 9.4
As can be seen, the table verifies Kudlow's figures for the growth of total receipts the past two years and the growth of corporate income tax receipts in 2004. Kudlow's figures for "Income-tax withholdings" (-2.2% in 2003 and 2.5% in 2004) don't quite match receipts from individual income taxes but then they are not measuring the exact same thing. In any case, the table also verifies Kudlow's numbers for the growth in total outlays the past two years.
The table also shows that all shown categories of receipts went down in 2001, 2002, and 2003. To get a better view of how much receipts, outlays, and deficits have changed since 2000, the following table shows them all indexed with the year 2000 equal to 100:
RECEIPTS, OUTLAYS, AND DEFICITS INDICES (2000 = 100)
Classification 1997 1998 1999 2000 2001 2002 2003 2004
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Individual income tax 73.4 82.5 87.6 100.0 99.0 85.5 79.0 80.5
Corporation income tax 87.9 91.0 89.1 100.0 72.9 71.4 63.6 91.4
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Total Receipts 78.0 85.0 90.2 100.0 98.3 91.5 88.0 92.8
Total outlays 89.5 92.4 95.2 100.0 104.2 112.5 120.8 128.2
Surplus or deficit (-) -9.3 29.2 52.5 100.0 53.7 -66.6 -159.2 -174.1
Kudlow stated "It's clear: At lower marginal tax rates, the rising economy is throwing off a lot more tax revenues". But he fails to mention that this increase in revenues is only a partial recovery from a very steep decline. As the table above shows, revenues from individual income taxes have recovered to only 80.5% of their 2000 level. Revenues from corporation income taxes have recovered just 91.4% of the 2000 level, even after they "exploded 43.7 percent on the shoulders of near-record corporate profits". In any case, total revenues have recovered just 92.8% of the their 2000 level. The fact that they have recovered more than revenues from individual or corporation income taxes is not surprising. They include revenues from the FICA tax whose rate was NOT cut. Score one against the supply-siders.
Kudlow is an economist and should know better than to cherry-pick numbers like this. Then again, he would not be the first economist to let his political leanings affect his work.