Looking at Tax Revenues, Kudlow-style

Criticizing the latest offering from an economics writer for the National Review is usually PGL’s purview, but since he has chosen to ignore Lawrence Kudlow’s latest entitled “SOVIET-STYLE CENTRAL PLANNING” I figured I’d give it a whirl. Kudlow starts off with “[u]nfortunately, it’s beginning to look like two of Washington’s major institutions (The Fed & the CBO) want to sabotage the American economy.”

The CBO’s contribution to this sabotage takes the following form: “These folks are telling Congress that only higher taxes in the next ten years will balance the budget. Huh?”

See, “[t]his crowd actually believes that President Bush’s tax cuts will trigger a $1.7 trillion budget hole in the next decade. The reality is that in the last couple of years since they were implemented, there have been huge revenue gains rolling in to the Treasury from the strong economy.”

Now, one might point out that the deficit is at a historic high, even in real dollar terms. A sensible response, probably even Kudlow’s response, would be that this is the wrong way to view the deficit. We should, after all look at the deficit as a percentage of GDP. When viewed in that light, while the deficit is not pretty, its not yet as bad as it was in the Reagan era before Reagan reversed some of his tax cuts, and of course, not even close to the deficits during World War 2. (Budget deficit figures – nominal, real, and as a percentage of GDP are available at the White House’s Office of Management and Budget”)

Now, if we took the same sensible approach toward viewing tax collection, namely looking at tax as a percentage of GDP, the tax revenues that Kudlow is crowing about don’t look very good. Tax receipts were equal to 17.5 percent of GDP. In the 61 years between 1946 and 2005, tax receipts were greater than 17.5 percent 41 times, including for every single year of the Clinton administration. (In fact, adjusted for inflation, taxes collected in the year 2000 were greater than taxes collected in the year 2005.)

Kudlow ends his post with the words: “I don’t get it.” Well, I agree with him about something.