US Tax Revenues Beat Projections

by Mike Godfrey, Tax-News.com, Washington

25 May 2005

US tax revenues are powering ahead, rising 13.6% to $1.2 trillion in the first 7 months of the current fiscal year, according to the Congressional Budget Office.

CBO estimates that the government incurred a deficit of $235 billion in the first seven months of 2005, which is about $49 billion less than the shortfall recorded for the same period last year.

Individual income and social insurance (payroll) tax receipts, the two largest sources of revenues, have together accounted for about two-thirds of the increase in receipts: individual income taxes have increased by about $75 billion, or 16%, and payroll taxes by $24 billion, or 5.7%. Receipts of corporate income taxes rose sharply, by $43 billion, or 48%.

Most of the increase in income tax receipts occurred in April with the filing of tax returns. In its baseline projections, CBO anticipated strong growth in nonwithheld receipts for April. However, receipts have risen somewhat more than expected, suggesting several possibilities: certain types of income grew even faster in 2004 than expected; income growth was more concentrated than expected among high-tax-rate taxpayers; the impact of tax-law changes may have differed from that projected; or some combination of all three scenarios.

Receipts from corporate income taxes have totaled $134 billion so far this year, which is more than CBO expected at this point. In its baseline budget projections, CBO estimated that corporate receipts would total $216 billion this fiscal year, an increase of $27 billion, or 14 percent, over 2004 amounts. The 48% increase so far this year suggests that corporate receipts for the year are likely to exceed CBO's previous projections. However, corporate receipts over the remaining months of the fiscal year are especially uncertain because various corporate-tax-law changes take effect this year.

Spending in the first seven months of the fiscal year 2005 rose 7.1% to $1.4 trillion. Defense outlays rose 7.6%, including money for Iraq and Afghanistan, down from the double-digit increases of the last couple of years. But Medicare outlays grew by 9.6%. To the extent that the additional strength - especially in corporate tax receipts - persists, says the CBO, the deficit for fiscal year 2005 will probably be well below $400 billion, perhaps in the vicinity of $350 billion.

Although the surge in tax revenues is due to increased economic activity, no doubt with a contribution from lowered tax rates (a typical supply-side effect), the Government has done its best to spend the extra money. President Bush has signed every spending bill put in front of him, and government spending has risen to 20.3% of gross domestic product, up from 18.5% when Bill Clinton left office in 2001, and the highest level since 1995.

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