The trimming of the deficit is certainly a positive development. But this development does not lead to the conclusion that “the tax cuts are working,” as some now are claiming. Furthermore, the reduction in this year’s deficit from a very large one to a large one has little bearing on the nation’s shaky long-term fiscal foundation. A surge in economic growth is not behind the unexpected increase in 2005 revenues. Real economic growth in 2005 has not been unusually rapid, nor has it been stronger than was projected earlier this year by CBO or OMB. Thus, the unexpected gain in revenues does not reflect faster-than-anticipated economic growth. CBO has said that one possible reason that revenues are coming in faster than it forecast earlier this year is that increases in income may be more concentrated among high income taxpayers than it anticipated.
Check out their entire discussion, which continues by comparing the spin from the free lunch supply-side (or Laffer curve) crowd to the historical record and empirical evidence.
Update: See James Hamilton for another first-class discussion.