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Higher Tax Revenues To Cut US Deficit, But Trouble In Store

by Leroy Baker,, New York

27 August 2007

The Congressional Budget Office (CBO) has estimated that the US federal deficit for 2007 will be lower than in 2006 as tax revenues continue to rise, but the warned that the budget outlook for the longer term remains "daunting".

The CBO expects the 2007 deficit to total $158 billion— a $90 billion decline from the deficit recorded for 2006. Relative to the size of the economy, the deficit this year is expected to equal 1.2% of gross domestic product (GDP), down from 1.9% in 2006. The deficit for 2007 is now expected to be $19 billion lower than the amount estimated by the CBO in March.

Higher-than-anticipated revenues from individual incomes improved the budget outlook this year, according to the CBO, although these have been partially offset by outlays from supplemental appropriations that were enacted after the CBO prepared its March projections. Ongoing military operations in Afghanistan and Iraq are expected to boost outlays by 0.6% over the CBO's March estimates.

On the basis of tax collections recorded through July, the CBO expects that total federal revenues will rise by $170 billion in 2007 to $2.6 trillion. As a share of GDP, revenues are expected to grow from 18.4% in 2006 to 18.8% this year. Until this year, the increase in corporate income tax receipts contributed disproportionately to the improvement in total revenues. By contrast, this year’s growth has stemmed almost entirely from rising individual income taxes.

The 2007 increase in individual income tax receipts is due partly to solid growth in wage and salary income, and partly to rapid growth in nonwage income, the CBO noted, but until detailed data is available, it is not possible to identify those causes precisely, it added. For the most part, they appear to reflect underlying economic events that are unrelated to recent changes in fiscal policy.

Receipts from corporate income taxes will rise by over 6% in fiscal year 2007, the CBO has projected, to $376 billion. This reflects the growth in domestic corporate profits (as measured in the national income and product accounts), which are expected to increase by more than 4%. For both 2006 and 2007, corporate tax receipts as a share of GDP are at the highest level recorded since the late 1970s. Growth in corporate income taxes has slowed markedly in 2007, however, following three years in which corporate receipts grew by an annual average of almost 40%. The CBO expects the trend to continue, and anticipates that quarterly payments in September will show a further decline in the growth of corporate tax revenue (on a year-over-year basis).

Individual income taxes account for the projected rise in revenues as a percentage of GDP over the next 10 years. Revenues from corporate income taxes are projected to peak this year at 2.7% of GDP (a level last reached in 1978) and then gradually diminish. Other sources of revenue, the largest of which is social insurance taxes, are estimated to remain stable as a share of GDP.

The CBO said that the general fiscal outlook for the coming decade remains about the same as it projected in March. If the laws and policies currently in place did not change, the deficit for 2008 would fall slightly, to 1.1% of GDP, and then rise to about 1.5% of GDP for 2009 and 2010, the CBO projected. In the years that follow, deficits would give way to small surpluses as a result of higher revenues associated with the scheduled expiration of tax provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

However, despite some improvement in the short-term budget picture, the CBO warned that the nation faces substantial fiscal challenges over the long term. In particular, the rates of growth in health care spending will significantly affect the federal budget. "Attaining fiscal stability in the coming decades will almost certainly require some combination of reductions in the growth of spending and increases in taxes as a share of the economy," the CBO said.

Despite the gloomy long-term fiscal forecast, President Bush welcomed the CBO figures, saying that they vindicated his tax policies and were "good news for the American taxpayer".

"Like the estimates put forward by the Office of Management and Budget, it shows that our government is on a path to meeting the goal I set forth of putting the budget into surplus by 2012," he proclaimed.

"I again urge Congress to pass spending bills by the end of the fiscal year, without wasteful earmarks, without raising taxes, and in regular order - one at a time, and on time. Congress has an opportunity to rise to the occasion and work with my Administration to accomplish a balanced budget without raising taxes, and I hope they will do so upon their return to Washington in September," he added.

However, critics of the Bush administration's handling of government finances have accused the President of ignoring the more worrying long-term prognosis for the budget.

"Today's CBO report is only good news if you are looking in the rear view mirror," stated Robert L. Bixby, Executive Director of the Concord Coalition, a non-partisan group advocating responsible fiscal policy.

"Looking ahead, the same problems remain as large as ever and they are getting closer. Moreover, even the short-term outlook is not as promising as it appears on the surface. Strict adherence to the new Congressional pay-as- you-go rules and a great deal of discipline on appropriations bills will be necessary to make these projections a reality," Bixby argued.

The full text of the CBO's 'Budget And Economic Outlook' Report can be found in the Tax News Resources section.

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