Deficit figure jump-starts tax-cut debate

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This week's lower deficit figure has been a shot in the arm for tax cutters in Congress and has reignited the debate over supply-side economics and whether President Bush's 2001 and 2003 tax cuts helped or hurt the federal budget.

"Supply-side economics are alive and well," said Rep. Jeb Hensarling, Texas Republican and the budget point man for House conservatives, who added that tax cuts are the only explanation for the declining deficit. "Spending's not down; spending has increased every single budget. What happened is we're awash in tax revenue because supply-side economics is alive and well."

On Tuesday, the Office of Management and Budget (OMB) announced a projected deficit of $296 billion for fiscal year 2006 -- still the fourth highest ever, but $127 billion lower than predicted in February and, if the projection materializes, $22 billion less than last year's deficit.

The improvement was credited almost entirely to an 11 percent jump in federal revenues, far more than predicted just six months ago, which left tax cutters claiming vindication and calling for Congress to extend the 2001 and 2003 cuts. The OMB even included an entire section in its report to Congress crediting the tax cuts with solid economic gains and predicting that making the cuts permanent would further increase the national income by seven-tenths of a percent.

But Democrats said the tax cuts don't deserve credit for the declining deficit, and said federal revenue only now is returning to where it was when Mr. Bush took office.

In a letter yesterday to new Treasury Secretary Henry M. Paulson, New York Rep. Charles B. Rangel, the top Democrat on the House Ways and Means Committee, challenged the administration to prove the tax cuts' effects, saying his read of the new figures shows that wage and salary income is $71 billion less than predicted, and that companies now are sitting on cash rather than investing it.

"Economic growth that favors investment income and bypasses hardworking Americans relying on a paycheck is a recipe for disaster. Further, we're not even seeing the corporate investment the Republicans promised, so this so-called 'good news' rings hollow," Mr. Rangel said. "Since it's clear the Bush economy isn't benefiting working families, I have to ask: Where's the money going?"

In reviewing the new figures, Sen. Kent Conrad of North Dakota, the top Democrat on the Senate Budget Committee, said it's taken five years for the government to get back to the same level of revenue as in 2001, when Mr. Bush made his first tax cut. And Jim Horney, who studies the federal budget for the Center on Budget and Policy Priorities, said those praising the news actually are celebrating a projection error.

"It's probably not evidence of what's happening as far as the effect of revenues on the economy," he said. "It's simply the revenues are very volatile and it's very difficult to project them."

In a paper on the new numbers, his group said the economic recovery in the 1990s occurred about the same point after a recession, and that came after the 1993 tax increases under President Clinton.