The Congressional Budget Office (CBO) today came out with their "mid-session" review of the federal government budget.
CBO now expects the federal budget deficit to be $260 billion for 2006, or 2% of GDP. The entire improvement in the budget deficit forecast (a $99 billion improvement since March) can be attributed to massive increases in revenues from personal income and corporate income taxes.
To read the entire mid-session review, click here.
Since this is a tax blog, and since tax revenues are the main driver of the news, I wanted to summarize the revenue provisions of the CBO report:
2006 Tax Revenue Growth
Individual Income Tax: +14.3%
Corporate Income Tax: +22.2%
FICA/FUTA/SECA Taxes: +5%
Total Tax Growth: +11.6%
Taxes as a Percentage of GDP: 18.3% (about the post-1960 average)
It isn't difficult to see how the deficit shrank given that level of revenue growth.
Other Interesting Tax Revenue Highlights from the Report
This is the highest year-over-year revenue growth in 25 years.
The growth in individual income taxes comes from withheld taxes (up 7%), but even more so from estimated payments (up 20%).
Corporate income tax payments have begun to decellerate in recent months, so the party might be over here.
Assuming the war on terror continues, that discretionary spending grows at nominal GDP, EGTRRA/JGTRRA is extended, the expiring revenue extenders are extended, and the AMT is patched, CBO has the following spending, revenues, and deficits for the 2007-2011 period:
2007 |
2008 |
2009 |
2010 |
2011 | |
Spending |
20.4% |
20.5% |
20.6% |
20.7% |
20.9% |
Revenues |
18.0% |
17.8% |
17.7% |
17.4% |
17.4% |
Deficit |
2.3% |
2.7% |
3.0% |
3.3% |
3.5% |
Keep in mind that CBO notoriously under-estimates revenue growth (with the exception of the 2001-2003 recession period). It's a reasonable supposition that revenues will grow over this period to 19% of GDP, which would be a lower peak than was hit in the late 1990s.
Additionally, CBO is on the fairly conservative side when it comes to anticipated GDP growth. If the actual trend over this period is closer to the historical average, spending should trend downward just south of 20%.
That would leave a deficit of between 1-2% of GDP, which is economically insignificant. What is certain is that massively-increasing taxes in the period will severely depress savings, investment and economic growth.
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