In Tim Russert's recent interview with President Bush, Russert showed his partisan stripes by implying there was something fiscally irresponsible about cutting taxes when the economy was down, and attemped to get Bush to promise not to do another tax cut until the deficit was paid off.

The problem is, Russert has his economics wrong.

To pay off the deficit, it appears we need more taxes cut.

Long ago, when playing a fun little game called "Sim City", I noted that at first, when I increased the taxes on my little virtual people, I had more money with which to build roads, hospitals, etc. But this trick was only good for a few tries: After a while, I noticed that increasing taxes decreased my income, and made my virtual people move away.

Sim City is no replacement for reality, but it illustrated an important point. When liberals and other simple-minded folk such as myself would look at taxation, we thought about it in a very simplistic way -- what economists would call "static analysis". We'd think: If I just change this variable, everything else will stay the same. In this case: If we just raise taxes, the government will have more money, and nothing else will change.

The problem is, that kind of thinking is dead wrong, economically. And history proves it.

There's a little economic entity called "The Laffer Curve" which predicts that when your taxes are "too high", lowering the tax rates will actually increase the amount of money the government collects from taxes.

Why does this happen?

Think of the tax rate as the government's way of telling you how much it's worth it to make money. If you get to keep all the money you make, you might find it profitable to do a day's labor. On the other hand, if you learn that after a certain income level is achieved, you will only get to keep, say, one of five extra dollars you earn, then you might just decide: "Screw it, I've got enough. I'm going to take up gardening."

The problem with taking up gardening instead is that it decreases economic activity. "Economic activity" is just a fancy word for "creating wealth" or, in everyday terms: "Making things become more valuable to everyone." You have a yard full of sticks, I have a yard full of rocks. We trade, and bring in the guy with the vines, and soon we all have primitive pickaxes. Our work made us all wealthier.

So the guy who goes back to tending his roses isn't helping the economy as much as the guy who then goes out and starts a factory or delivery business. And part of his reasoning for making this decision (gardening versus starting a business*) is due to his expected return on his work. Which is set by the government tax rates.

The Laffer Curve says taxes are "too high" when you can decrease the tax rate and find you've increased the income you receive from taxes. "Are we there yet?" Well, currently about half of every dollar we make goes to taxes. I'd guess, just off the cuff, that that's probably in the "too high" zone. (In Sim City, for what it's worth, the cutoff point was around 6%!)

But, because we have a President who's willing to cut taxes, we are doing a real-life experiment to see if rates are currently "too high". In an excellent TownHall.com column, Jerry Bowyer talks about the results:

This year’s economic experiment indicates that in fact rates were indeed too high. The evidence for this is that the beginning of FY 2004 is showing higher tax revenues than the comparable period for FY 2003. It appears that the tax cut of 2003 has created higher tax receipts for 2004. For October and November of this year (which are the first two months of FY 2004 and the only two months available so far) Federal tax receipts were $254.03 billion which is $9.5 billion higher than last year’s revenues of the same two months. In fact the Bush tax cut last spring seems to have even had a positive impact on FY 2003 despite the fact that it happened late in the fiscal year: The Congressional Budget Office had forecasted a deficit of $401 billion and The Office of Management and Budget had forecasted a deficit of $455 billion. When the actual numbers came out recently it turned out that OMB had been $81 billion too pessimistic; the deficit turned out to be a much lower than expected $374 billion.

Note the key sentence: Taxes are down, but tax revenue has gone up up. This suggests that, in our current situation, it will be important to cut taxes even further in order to pay off the deficit.

That's the kind of statement which drives liberals crazy.

Look, nobody becomes a conservative, at least in my world, to make more friends and be well-loved at parties. But if you really want to help people, you have to believe in things which actually work. There's no virtue in having hope in your head, love for all mankind in your heart, and running the world from a wrong economic model which leaves everyone scrounging for a nice juicy locust to offset the hunger pangs.

The sad thing is, this kind of ignorance often passes as "knowledge". In the present case, I distinctly remember an NPR radio show several years ago featured several economists who all swore, up and down, that the Bush tax cuts would not expand the economy enough to offet the decreased tax rate. That tax income would go down, not up. So far, its looking like they were all dead wrong.

This trend has a good historical precendent: Remember Ronald Reagan? A friend of mine recently remembered, mockingly, his economic stupidty. Reaganomics she and his other critics called it.

The problem was, Reagan was right also. And his critics, to the contrary, were actually revealing their own economic ignorance. When Reagan dropped taxes, as in the current example, government tax revenues actually soared.

So why the famous Reagan deficit?

Because both the Republican President, and the Democratic Congress (who holds the purse strings, boys and girls) spent this new income faster than it came in.

Lastly, I'd like to make a note about the shape of the tax cuts. It's not any tax cuts which help. People have to believe the tax cut is permanent, or they'll just squirrel the temporary savings away rather than making serious changes. Second (hold your breath here, folks) the rich must be included.

Again, this is not the kind of statement which wins you friends at parties.

But remember, it's the rich -- or potentially rich, anyway -- who start the factories, open new businesses, and employ almost everyone we know. It's the rich who can decide whether to start a new business or tend roses. They're the ones who have risen above $120K per year per person and are deciding how to invest that extra money. What we tell them, with the tax code, effects whether and how they invest that money, or not.

Remember this when some politician (Kerry) tells you he doesn't mind the Bush tax cut, per se but would make sure he shifted it around so that the rich get the short end of the stick. But in doing so, Kerry will essentially be telling the rich: Screw it. Don't build a company, at least not here. Forget expanding the economy. That extra income is ours, give it here!

Who's going to invest on those terms?

Tend roses instead.