Tax Revenue Boost To Cut US Federal Deficit

by Mike Godfrey, Tax-News.com, Washington

08 May 2006

The United States' 2006 federal deficit is likely to be substantially less than previously forecast, thanks in part to robust growth in tax revenues, according to the Congressional Budget Office.

The CBO, a non-partisan arm of Congress, stated in its monthly Budget Review last week that the deficit will be "significantly less" than $350 billion, and perhaps as low as $300 billion in FY2006, assuming enactment of the pending supplemental appropriations and tax reconciliation legislation.

Earlier in the year, a CBO report predicted that the deficit might well exceed $400 billion in 2006 because of tax cuts and new spending, in line with the expectations of many economists. It also suggested that President Bush is unlikely to be able to keep his 2004 promise to cut the federal deficit in half by the end of his term.

However, the CBO now estimates that in the first seven months of fiscal year 2006, the federal government ran a deficit of $183 billion - $53 billion less than for the same period last year. In March, the Treasury reported a deficit of $85 billion, about $2 billion less than CBO had projected.

Receipts in that period rose by about $137 billion, or more than 11 percent. Receipts of corporate income taxes have grown the most rapidly so far this year — by about $40 billion, or almost 30 percent. Receipts of individual income taxes have increased by more than $55 billion, or 10.2 percent, and receipts of social insurance taxes have risen by $32 billion, or 7.2 percent.

Payments of corporate income taxes through April have risen more than the CBO expected at the beginning of the year. CBO anticipated receipts for the entire year to increase by $24 billion — or about 9 percent. But in the first seven months of the year, they have already increased by $40 billion.

"It is very likely that corporate receipts will end the year well above CBO’s previous projection, with the amount depending on corporate profitability in future months," the report stated.

Growth in individual income and payroll taxes has stemmed in part from withheld receipts, which have increased by $59 billion, or about 6.5 percent, so far this year. That result reflects continued growth in wages and salaries in the economy, according to the CBO.

However, the report noted that a number of factors may be playing a role in the strength of final payments transmitted with income tax returns. For example, various types of personal income not automatically subject to tax withholding, such as capital gains, noncorporate business income, interest, and dividends, may have increased faster than expected in 2005.

In addition, growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers, who face the highest tax rates.

Recommended