- The Washington Times - Wednesday, July 13, 2005

Surging revenue from growing incomes and stock market gains prompted the White House yesterday to lower its estimate of the budget deficit this year by $94 billion, in what it said was the best revenue performance since 1981.

The dramatic reduction in the deficit estimate to $333 billion for the year ending Sept. 30 reflects sharply higher receipts at the Treasury since April, averaging $1 billion more a day, or 14 percent higher than last year’s levels.

The Congressional Budget Office (CBO) and private economists also have revised their deficit forecasts to reflect an improving revenue trend as the economic expansion matures, the stock market recovers and the unemployment rate declines to a historically low 5 percent.

The CBO and the White House attribute the revenue gains to several factors, including a pickup in bonus and stock-related income for top earners, a one-time tax holiday for corporations repatriating income from overseas and the expiration of a tax break for corporate investments at the end of last year.

In announcing the brighter deficit picture, President Bush noted that it puts the administration ahead of schedule on its commitment to shave the deficit by half from its peak of more than $400 billion in fiscal 2004.



“It’s a sign that our tax-relief plan, our pro-growth policies, are working,” Mr. Bush said after a Cabinet meeting. “These numbers indicate that we’re going to cut the deficit in half faster than the year 2009, so long as Congress holds the line on spending.”

But the improvement will be short-lived, forecasters say, because federal spending on Social Security, Medicare and other entitlements is projected to balloon as the baby boomers start retiring at the end of the decade.

The revenue windfall, far from ushering in a brief period of surpluses as a similar revenue surge did during the 1990s, will leave a deficit that is still the third-largest in history.

But as a share of the $11 trillion U.S. economy, the deficit will drop to 2.7 percent — a moderate level by historical standards, noted Office of Management and Budget Director Joshua B. Bolten.

“We’re seeing what happens when you have a strong economy — more businesses investing, more people working with more income,” he said.

Revenues are improving at all levels, he said, but the government does not have enough information to determine exactly the biggest factors contributing to the windfall.

Because the surge has emerged since the tax deadline in April, economists say it appears to be largely a result of taxes that are not withheld from wages — including capital gains, corporate profits and stock-related personal income.

The 1990s revenue surge appeared suddenly and mysteriously as well. Only in retrospect was it determined to be mostly the result of the booming stock market.

In particular, stock options, a popular form of compensation during the 1990s, enriched the Treasury because they usually are taxed at the highest individual tax rates of more than 30 percent, rather than lower capital-gains rates when they are exercised.

Since 2002, fewer corporations have been giving their executives and employees stock options as a result of the scandals at Enron, WorldCom and other companies, in which executives were accused of manipulating their books to gin up the value of their stocks.

But most executives today continue to receive a large share of compensation in the form of stock, often as restricted grants, and last year were able to take advantage of a second straight year of stock market advances to cash in their gains.

Democrats and deficit hawks cautioned against counting on the elusive gains from the stock market and other one-time windfalls to fund permanent tax cuts and spending increases.

“One should not jump to the conclusion that this spike in revenue will be a recurring event,” said Rep. John M. Spratt Jr., South Carolina Democrat and ranking member of the House Budget Committee.

“Policy-makers should not repeat the mistakes of 2001 by allowing improvements in the short-term budget outlook to serve as an excuse to relax already overly lax fiscal discipline,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

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