Corporate Gains Shrink Deficit

Debt Projected to Rise in 2008

Surging corporate profits -- and another big increase in corporate tax collections -- will shrink the federal budget deficit to its smallest number in five years, according to new White House estimates, which show the deficit falling to $205 billion in the fiscal year that ends in September.

But the gusher of revenue is already starting to slow dramatically, the projection shows, and the deficit is expected to increase to $258 billion in the fiscal year that begins in October.

President Bush yesterday ignored the bad news and took credit for the good, saying his tax cuts in 2001 and 2003 had stimulated the economy, generating a revenue windfall for the Treasury.

"The message is unmistakable: America's economy keeps growing, government revenues keep going up, the budget deficit keeps going down -- and we've done it all without raising your taxes," Bush said during a speech at the Eisenhower Executive Office Building, where he introduced two small-business owners, a member of the National Guard and the parents of eight children. He said they all racked up big savings thanks to the tax cuts.

"When you've got more money in your pockets to save, spend or invest, this causes the economy to grow," Bush said, adding that "a growing economy has led to growing tax revenues. Because people are making more money, they're also paying more taxes."

Democrats dismissed Bush's claims, noting that the nation's fiscal outlook is far worse now than it was when he took office in 2001. Then, the country was enjoying a budget surplus. Since then, it has plunged into deficit, in part because of a recession, wars in Iraq and Afghanistan, and a hugely expensive Medicare prescription drug program. The red ink hit its peak in 2004, when the deficit reached $413 billion, before receding to $248 billion last year.

Despite the improving revenue picture, tax collections are far lower -- $275 billion this year -- than was forecast before Bush took office, House Majority Leader Steny H. Hoyer (D-Md.) said in a statement.

"It is a sad commentary on President Bush's fiscal record that he is crowing that the deficit will be 'only' $205 billion," Hoyer said.

Many economists say Bush's tax cuts also contributed greatly to the deficit. Over the past six years, the cuts have cost the federal government more than $1 trillion, returning the money to taxpayers. That cash probably helped lift the economy out of recession, economists said, but they added that the Federal Reserve's decision to cut interest rates to their lowest point in decades was probably more important.

"I would say the tax cuts would, at best, be one factor among many," said Alan D. Viard, a former Bush White House economist who is now a resident scholar at the American Enterprise Institute.

Whatever power the cuts had to spur growth immediately after their passage, however, is likely to have long since dissipated, said Jan Hatzius, chief U.S. economist for Goldman Sachs. "The tax cuts in 2003 certainly provided quite a bit of fiscal stimulus," he said. "But that was a long time ago. Changes from 2006 to 2007 I don't think have much to do with tax cuts."

So what's been driving the unexpected growth in revenue over the past three years? In part, it's a strong economy.

But according to a recent analysis by the nonpartisan Congressional Budget Office, revenues grew much faster than the economy between 2003 and 2006, primarily because of a surge in corporate profits. Corporate tax receipts grew from 1.2 percent of the economy in 2003, their lowest level since 1983, to 2.7 percent of the economy in 2006, their highest level since 1978.

Peter Orszag, head of the budget office, said it was still working to explain that expansion. But he said a growing body of research -- including evidence that corporate profits in Europe and Japan experienced similar expansion -- suggests that Bush's tax policy had little to do with it.

"It is not the case that U.S. tax-policy changes drove the change in corporate profits, which drove the increase in corporate tax revenue," Orszag said.