Cut taxes, increase tax revenues?

The Wall Street Journal writes that tax revenues in America are growing and gives the credit to President Bush’s tax cuts, urging the Congress to make them permanent.

The chart provided in the article shows that the revenues as a share of GDP have climbed substantially and are back to the level they were at around midterm of Mr Bush’s first period as president. They are still much lower than they were during the late 90s, but those numbers were artificially increased due to the dot com bubble.

There is something called Laffer curves, which – slightly simplified – claims that there’s a level of taxation where, if you increase taxes further, revenues will drop. This is pretty intuitive when you think about it. After all, at 0% revenues will naturally be 0. And att 100% revenues will also be very low, as there’s really no incentives for people to work (not considering slavery work, that one is forced to do under pain of penalties).

What is the optimal level of taxation then? Well, that’s very difficult to say. Also I assume things are a little more complicated than how I’ve just described them – it should be of some significance how the tax system is constructed.

These complications set aside it seems as if these tax cuts are working and that the total tax level was too high earlier. Which says something about European tax levels, not to mention the Swedish ones. But, as is also said in the article, this doesn’t mean that the budget deficit problem is anywhere near solved. Sure, revenues have increased by about $100 billion (a staggering amount), but the deficit is still large, though not catastrophically so. The solution is obviously better disciplin in spending. After all, in the long run you should’t spend more than you can afford. And, when it comes to public spending, you shouldn’t spend more than you absolutely need either.