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Correction to This Article
A July 11 Business article incorrectly said that President Bush has promised to halve the budget deficit from the figure of $412.7 billion reported in 2004. The pledge to cut the deficit in half by the time he leaves office was based on an administration projection that year that the deficit for that year would be $521 billion, or 4.5 percent of gross domestic product.
Smaller Budget Deficit Projected
Tax Cuts Credited; Long-Term Outlook Still Seen as Bleak

By Paul Blustein
Washington Post Staff Writer
Tuesday, July 11, 2006; D01

The Bush administration is planning to trumpet today a midyear revision of its budget estimates projecting that a recent surge in tax revenue will help to shrink this year's federal deficit below $300 billion, according to sources familiar with the estimates.

The fanfare is slated to include a presidential speech in the White House East Room and an appearance by Budget Director Rob Portman at the National Press Club to drive home the message that the administration's tax cuts are working.

But the favorable news about the money rolling into the Treasury stems largely from shifts in the economy, including fatter corporate profits, executive bonuses and stock market gains, that reflect growing inequality, the administration's critics contend. And even the White House acknowledges that in the long run, the nation's fiscal outlook remains bleak.

The improvement in the deficit for this fiscal year, which ends Sept. 30, has become apparent in recent months as the Treasury's reports of tax receipts have repeatedly exceeded initial forecasts. In May, the nonpartisan Congressional Budget Office said that the government's red ink "will be significantly less than $350 billion, perhaps as low as $300 billion." That is substantially less than the 2004 deficit of $412.7 billion, which was an all-time high in dollar terms, though at 3.6 percent of gross domestic product not as great a proportion of the economy as some deficits in years past.

Now the administration has an opportunity to crow about the numbers as it issues the revised estimates required by law. Because of a 13 percent rise in tax receipts for the nine months ended in June, the administration will project that the deficit will narrow to slightly less than $300 billion, according to sources who spoke on condition of anonymity because the estimates will not be officially unveiled until today. That would be down from the $318.3 billion of 2005.

The anticipated decline in the deficit is especially welcome because most forecasters expected the costs of hurricane relief and the war in Iraq to widen the budget gap this year. The White House had been among the most pessimistic, projecting a deficit of $423 billion in February, compared with the CBO's projection of $371 billion.

The administration's estimate was widely derided at the time; budget experts said aides to President Bush were overestimating the red ink so they could claim credit later when the actual figures came in below forecast. Still, the magnitude of the growth in tax receipts and the narrowing of the deficit have surprised analysts across the political spectrum and have prompted tax-cut advocates to claim vindication.

"The supply-side tax cuts of 2003 are working exactly as we would have expected," said Daniel Mitchell, a budget specialist at the Heritage Foundation. "Lower taxes on work, saving and investment leads to more work, saving and investment. It's not exactly rocket science."

But tax revenue often soars or plummets unpredictably with the stock market, and a troubling story emerges from a look at the main sources of the latest revenue bonanza, according to the administration's critics.

"This all relates to the widening income disparities between high-income individuals and the rest of the population," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities.

Among the fastest-growing types of revenue were corporate income taxes, which rose 26 percent in the nine months ending June 30, according to the CBO. Fueling that growth were skyrocketing corporate profits, which on a pretax basis reached 12.7 percent of GDP in the first quarter of 2006, the highest level since 1950, said Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc.

"We've had strong growth in profits, but not very much of an increase in wages and salaries," Hatzius said.

Another major source of revenue growth were taxes that are not withheld from paychecks, typically capital gains and year-end bonuses for Wall Streeters and other upper-income people. Revenue from those types of taxes has risen 20 percent, compared with 8 percent for taxes withheld from the paychecks of salaried employees.

Whatever the source of increased revenue, the numbers to be released today bolster predictions that Bush would meet his goal of cutting by half the 2004 deficit of $412.7 billion by the time he leaves office. But that does not erase much deeper worries about the budget woes that will beset the economy when members of the baby-boom generation reach retirement age over the next couple of decades. Projected deficits for the middle of the century, though obviously subject to much imprecision, would account for such a large portion of the economy that they would drive the government's cost of borrowing -- and thus interest rates throughout the economy -- to unaffordable levels, economists generally agree.

"Even if somehow we balanced the budget by, say, 2010, we would look forward to an enormous fiscal problem," said Douglas Holtz-Eakin, a former CBO director and Bush White House economist.

"The projections are that the Social Security surplus will peak in 2010, and diminish every year thereafter, so ultimately, instead of collecting 5 cents on the national dollar and paying out 4 1/2 cents, we will continue to collect 5 cents and pay out 7 cents," Holtz-Eakin said. "And that's the good news. The bad news is Medicare. The demands on the Treasury go from 4 cents on the national dollar to 22 cents in the next 50 years."

The administration, in the "Analytical Perspectives" it published with its budget in February, made a similar point, saying, "The budget is on an unsustainable path."

The economy could grow out of the problem if the recent increases in revenue were to continue long into the future. "But in the long run, we probably can't count on those increases in revenue," said Mitchell, the Heritage economist. "And the fact that spending is growing at such an unsustainable, irresponsible clip has to be deeply troubling."

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