Keep it going: the robust economy, that is--and you do it by locking in the tax cuts.(Public Policy)(Economic indicators)

DON'T look now, but the U.S. economy has just shifted into fifth gear and is now purring like a Porsche. The latest job numbers indicate that the unemployment rate has fallen to 5.2 percent--its lowest in more than three years--compared with 11 percent in Germany, 10 percent in France, and 8.5 percent in the entire workers' paradise of Euroland. Today a record number of Americans are working. And these workers are producing more cars, corn, cotton, computer chips, microchips, microwaves, and widgets than ever before. The latest Labor Department data indicate that worker productivity has surged by more than 4 percent for three years in a row for the first time in a half-century. Productivity improvements are the key to higher wage rates, so these are mighty welcome numbers for middle-class workers.

Other signs of bullishness abound. The stock market is up about 45 percent over the past two years and most of the $6 trillion in investor-class losses from the bursting of the financial bubble in 2000-01 have been recouped. America's economic-growth rate over the past year was 4 percent, which is about twice the progress our industrial-nation competitors have managed to muster. Business investment, a bellwether for growth, continues to surge. Inflation is surprisingly tame. Even the most worrisome economic indicator, the fall in the dollar, has started to stabilize as global investors notice that betting against the U.S. economy is foolish.

Almost no one in the chattering classes in Washington wishes to admit it, but lo and behold the Bush tax cuts are working as planned. The tax cut that packed the biggest economic punch was naturally the most controversial: the 2003 reduction in the dividend and capital-gains taxes to a rate of 15 percent.

The Left's opposition to this planned "tax giveaway to the rich" was frenetic and ferocious. Economists such as New York Times columnist Paul Krugman ridiculed the tax cut as exactly the wrong medicine for the ailing economy, because it was oriented to goosing investment, not spending. Bush's critics assured us that the predicted larger budget deficits from the tax cut would lead to a catastrophic chain reaction: higher long-term interest rates, a stock-market decline, and a drought in investment and growth. Well, the skeptics have had to eat some crow. For example, long-term interest rates for mortgages are hovering near historic lows.

Even the tax-revenue consequences of the rate reductions in the personal-income, capital-gains, and dividend taxes have been surprisingly benign. Last year was the first since 2000 in which tax receipts at the federal level grew, rather than receded. And at the state and local levels of government, tax receipts are exploding, with most governors now managing surpluses again.

Larry Kudlow reports that federal tax receipts from non-wage income--i.e., from investments and capital--are up nearly 10 percent over last year. It's too early to tell for sure, but it may well be that the capital-gains and dividend tax-rate cuts paid for themselves by inducing more profit-taking by shareholders and more dividend payouts by firms. The Laffer Curve strikes again.

The dividend-tax cut was intended to cut the cost of owning stock and encourage firms to pay out dividend checks to shareholders. A Cato Institute study in 2004 found that Fortune 500 companies paid out some $60 billion more in dividend checks than under the old tax regime. As Milton Friedman taught us: When ...