01:00 AM EDT on Tuesday, July 18, 2006

As aficionados of classic newspaper headlines, we note the headline over the lead story in the July 2 New York Times: "Surprising Jump in Tax Revenues Curbs U.S. Deficit."

This reminds us of The New York Times headline that appeared after a report from the U.S. Bureau of Crime Statistics: "Crime Falls Despite Rise in Prison Population." Crime often falls precisely because more criminals are behind bars!

Since the Reagan years, it has been the policy of Republican administrations to cut taxes to spur the economy and please the many affluent people who tend to vote Republican. The idea is that the stimulation provided by tax cuts expands the economy, boosting total tax revenues in spite of lower tax rates, and that has happened to some extent sometimes. At least to some people (though apparently not editors at The Times), the latest "jump" in revenues was not surprising at all, but an anticipated product of economic policy.

It is obvious that many people respond to lower tax rates by becoming more economically exuberant. For instance, corporations increased dividend payments when the top tax rate on dividend income, 35 percent, fell to 15 percent. And more people invest and buy consumer stuff when the capital-gains tax is cut. (If they think it will be raised again, they may do something else. Fears that tax policy will change can reduce investment. Predictability is healthy.)

And then there are more such non-recurring items as bonuses, the exercise of stock options, and so forth, all of which produce more revenue for tax collectors when taxes stay moderate than when they increase.

We also know that people move from one jurisdiction to another to seek lower tax rates. Interestingly, even the most enthusiastic liberals often do this -- even unto moving some of their money out of America.

Still, the deficit remains huge; America is in the midst of astronomically expensive, open-ended, and "cost-plus" wars in two countries; and the lust for special government spending for powerful interest groups remains unsated. And cutting taxes in ways that most directly benefit the richest taxpayers can undermine government credibility. Democracies, to flourish, need an environment in which people sense that there is opportunity for all, and in which a plutocracy does not totally run the show.

Nobody knows what the precise best balance -- for social justice and prosperity -- is between taxes and spending. We do know that when taxes are cut too much and spending is unrestrained, financing the federal debt can become so awesome that it sucks money away from capitalist enterprises, drives down the dollar, and does a multitude of other things that are bad for the economy and society -- even for the rich. Are we now at that point? We just don't know, but we're fearful.

Truth be told, taxes and spending remain alarmingly unbalanced. It is a sign of the fiscal fantasyland that is Washington that the Bush administration was crowing these past few days that the deficit would be a mere $296 billion in the current fiscal year: 30 percent lower than what the administration predicted last winter. That used to be considered real money!

Even the administration assumes that spending will exceed revenue for at least the next five years. Further, note that with the Bush tax cuts, tax receipts fell from 2001 through 2003 (albeit partly because of recession and the heavy effects of 9/11).

The economy is said to have grown 20 percent since 2003, a figure equal to the entire gross domestic product of China. More jobs, increasing revenues, and falling deficits are good things, however you slice 'em. But the budget and trade deficits remain vast, and no one knows how big the ultimate bill will be to cover them, especially with the pending retirement of the Baby Boomers.

To compound the policy challenge, high energy prices and interest-rate hikes may now be sending America into a recession -- with the lower tax revenue and higher expenses that that entails.

In any event, the federal government needs discipline -- spending cuts in such boondoggle-rich areas as giveaways for agribusiness and other areas. If those are politically impossible, then it will also need tax increases, as the Baby Boomers' "golden years" approach.