The wonders of Voodoo Economics

Who says you can't cut taxes, increase spending and reduce the federal budget deficit all at the same time? That's what the Bush administration has managed to do. Two decades after then-presidential candidate George H.W. Bush characterized Ronald Reagan's idea that tax cuts would spur revenue-generating economic growth as "voodoo economics," the witch doctor is again at work.

When President Bush pledged in 2004 to cut the deficit in half by 2009, critics guffawed. The Boston Globe headlined a story, "Bush's plan to halve federal deficit seen as unlikely; higher spending, lower taxes don't mix, analysts say." "Fanciful," "laughable" and "all spin," said the critics.

Well, it turns out that 2009 might be coming early this year. The 2004 deficit had been projected to hit $521 billion, or 4.5 percent of gross domestic product. Bush's goal was to cut it to 2.25 percent of GDP by 2009 - not as stirring a national goal as putting a man on the moon, but one that was nonetheless pronounced unattainable. This year, the deficit could go as low as $300 billion, right around the 2009 goal of 2.5 percent of GDP.

The key to the reduction is revenue growth, which has been stoked by economic growth. Government revenues are up 12.9 percent in the first eight months of this year over the same eight-month period last year - without any tax increases. When individuals, investors and corporations have more cash in a growing economy, they send more to the federal government in tax payments.

A couple of rounds of Bush tax cuts also played some role in the economic expansion and therefore are responsible, partly, for the increased revenues. This doesn't mean that tax cuts "pay for themselves," as their most fervent advocates say. But they certainly can offset some of their own cost.

According to Brian Riedl of the Heritage Foundation, if annual spending increases in the Bush years had been limited to the rate of the Clinton years, roughly 3.3 percent, there would be a federal surplus now. Instead, spending has been growing at 8 percent a year. That demonstrates that the formula for deficit reduction from the 1990s - moderate-spending restraint coupled with higher-than-expected growth-generated revenues - would work again today, if only someone could manage the moderate-spending restraint.

Another similarity from the 1990s is that the revenue surge is driven by high-end earners and corporations. Liberals always rue it when the rich get richer, but when they don't, the federal fisc tends to be ruined because they are the ones who pay most of the taxes. Almost 47 percent of income taxes are paid by those making more than $200,000 a year, and they are thriving again after taking a bath early in the decade. A chunk of the current revenue surge is also from corporate income taxes, which are up 30 percent over last year.

There are limits to voodoo. Today's fiscal improvements will be overwhelmed by the exploding costs of entitlements just over the horizon. In light of that, we should be maintaining a high-growth, low-tax economy to reap all the benefits of growth, but dutifully restraining entitlements. That's not sorcery, but just good sense.

Rich Lowry is editor of the National Review.

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