The Conscience of a Liberal: Paul Krugman

October 16, 2007, 9:22 pm
Failing to Pass the Laffer Test

OK, a followup on my previous tax revenue post.

The revenue boom of the last few years, which mainly depended on booming corporate profits, is over. Here’s a chart from the Congressional Budget Office:


And a further slowdown is visible within the fiscal 2007 data: revenue in September was up only 2 percent from the previous year.

To put this in perspective, here’s revenue as a percent of GDP since Clinton took office:


So everything you’ve heard about how revenues have boomed since the Bush tax cuts is wrong. What really happened was that revenue plunged, as a percent of GDP, in the early Bush years, then staged a partial, but only partial, recovery. And that recovery seems to have run its course.

UPDATE: Aha, I forgot to point out that GDP growth has not been exceptionally strong under Bush, so that I’m not cheating by looking at revenues as a percent of GDP. Check out Figure 2 here.

Yet on the basis of this experience, both Bush and his would-be Republican successors are proclaiming that tax cuts actually increase revenue.