Effects of Taxes on Labor Income

Many people in Washington have long known a dirty little secret about tax-cut measures: When done right, they actually result in more money for the government.

Ever since the Senate approved the last major tax relief bill, in 2003, revenues have increased every year. In 2004, they went up 5.5%. Last year, they rose 14.5%, the largest increase in nearly 25 years.

Total government collections, in fact, increased more after President Bush's 2003 tax cuts than they did after President Clinton's 1994 tax hikes.

In 2000 and 2001, the end of the dot-com bubble, the 9/11 attacks and a series of corporate scandals sent the economy into a tailspin. During the downturn, high taxes limited economic growth and kept receipts down. Although Americans were making some of the largest per-household tax payments in our nation's history, revenues plummeted in 2002 and 2003. When the major tax-relief measures kicked in, they restored the economy to health and helped deliver quarter after quarter of strong growth.

Republicans' decision to reduce taxes on capital gains and dividends provides a good case study in effective tax policy. When we enacted these measures in 2003, the Congressional Budget Office estimated that revenues would decline by $27 billion over the next two years. Instead, it turned out that the tax cut stimulated investment and increased revenues by $26 billion — a $53 billion difference.

That difference, by the way, provides enough money to fund the entire Department of Justice for more than two years.

If we really want to avoid burdening our children and grandchildren with debt — which does represent a major problem — we need to reform entitlement programs. Within the lifetimes of today's college students, the combined budgets of Social Security, Medicare and Medicaid will consume all federal revenues, leaving nothing for defense, education, housing or any other program.

Making sure that our children and grandchildren don't face the burdens of debt requires that we reform these entitlement programs and set them on a sustainable course for the future. A sensible low-tax policy that keeps the economy growing will play a major role in confronting our fiscal challenges.

Sen. Bill Frist, R-Tenn., is Senate majority leader.