Economic Growth, Tax Receipts Combine to Reduce Deficit
Saturday, July 2, 2005
An unanticipated surge of tax payments may push the 2005 federal budget deficit as much as $100 billion below official forecasts, leaving Republicans to claim vindication in their theory that lowering tax rates actually boosts tax receipts.
In addition, this week the Commerce Department reported a solid economic growth rate of 3.8 percent for the first three months of 2005, an improvement on the earlier 3.5 percent estimate and more ammunition for Republican boasts that their tax cuts are the cause of this performance.
"Sustained, strong . . . growth confirms that our policies continue to boost the economy and tax revenues," said Rep. Jim Nussle (R-Iowa), chairman of the House Budget Committee.
But senior budget analysts, including the Republican who heads the Congressional Budget Office, cautioned this week that higher tax revenues may be a one-time phenomenon that in no way addresses the nation's grave deficit challenge.
Much of the increase could stem from temporary factors, said CBO director Douglas Holtz-Eakin, a former Bush White House economist. The major corporate tax cut of 2004 provided a one-year "tax holiday" for multinational corporations to bring home overseas profits at a reduced tax rate, and companies may be responding aggressively. Also, a large tax break for business investment ended Dec. 31, effectively raising some corporate tax rates this year, Holtz-Eakin said.
Finally, strong stock market gains last year, coupled with lingering jitters from the market swoon of 2000, may have produced strong executive bonuses and a rush to cash in stocks and stock options, other economists said.
"I find it difficult to get as excited about this as some people" are, Holtz-Eakin said.
For longtime champions of supply-side economic theory, the excitement is palpable. Since the political rise of Ronald Reagan, such conservative economists have contended that cuts in income tax rates and in taxes on investment income would generate economic growth that would in turn produce more revenue, possibly enough to pay for the tax cuts. The theory was popularized by economist Arthur Laffer and his Laffer curve.
The government's take this tax season validates that theory, conservatives say. On a single day, June 15, the Treasury took in a record $61 billion. Through June 30, three-quarters of the way through the fiscal year, receipts indicate the Treasury will reap $80 billion to $100 billion more in taxes than the CBO predicted in January. Individual tax payments have risen 21 percent beyond their level at this time last year. Corporate tax receipts are 48 percent ahead.
Despite slightly higher-than-expected spending, the federal deficit could come in at $325 billion to $350 billion, significantly better than the White House's $427 billion projection or the CBO's $400 billion forecast. Some Wall Street economists say the deficit could be as low as $300 billion.
"The numbers are an eye-popping vindication of the Laffer curve and the Bush tax cut's real economic value," anti-tax activist Stephen Moore wrote in the Wall Street Journal.
Michael T. Darda, chief economist of the Connecticut equity firm MKM Partners LLC, estimated that economic growth generated by the Bush tax cuts would generate $1.5 trillion in tax receipts over the next decade, nearly enough to recoup all the revenue loss expected due to lower rates. Writing for the conservative National Review, Darda blasted the "no-growth neo-Malthusian Democrats" and the "root-canal contingent" of the GOP who continue to fret over the budget impact of tax cuts.