July 12, 2006
Wednesday

WASHINGTON -- President Bush is crediting his signature tax cuts in 2001 and 2003 for an anticipated 30 percent drop in the deficit to $296 billion. Although some analysts agreed that tax cuts helped produce higher economic growth and tax revenue, they warned that Bush and the Republican-led Congress are spending the money very fast.

The revenue burst, while welcome, masks a dangerous longer-term picture, the analysts said.

"I think you should buy yourself a very small brownie, light a candle and blow it out," said former Congressional Budget Office Director Douglas Holz-Eakin. "This is tiny compared to the big problem, and it's on the wrong side of the budget. The big problem is on the spending side, and there is a question of just how permanent this will be."

If Republicans hope to calm their base over spending, they will find scant help from conservative budget analysts.

Since Bush has been president, "We've had the biggest education bill ever, the biggest farm bill ever, the biggest highway bill ever, and the biggest Medicare expansion ever," said Brian Riedl of the conservative Heritage Foundation.

In addition, the cost of the war in Iraq has topped $300 billion and spending on Hurricane Katrina and other hurricanes from last year has now reached $123 billion.

"There is no fiscal discipline at all going on," said Veronique de Rugy, a budget analyst at the conservative American Enterprise Institute. "It's utterly shocking for me to hear an administration that claims to be conservative focus exclusively on the deficit, because the deficit is a pretty meaningless measure of the size of government. ... If they were fiscally responsible, they would want the total size of government to shrink, and that's not happening."

Still, Bush and the Republicans in Congress hope the news of rising tax revenues and declining deficits begins to reassure the conservative base that has been deeply disenchanted with the administration's free-spending ways.

"Some in Washington say we had to choose between cutting taxes and cutting the deficit," an animated Bush told assembled congressional and administration officials this week. "You endured that rhetoric hour after hour on the floor of the Senate and the House. Today's numbers show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring."

For the second year in a row, tax collections are growing at a record clip, up 13 percent in the first half of the year, after rising 14.6 percent last year. Corporate tax receipts rose at a double-digit pace, more than 26 percent, through the first half, reflecting higher corporate profits.

Personal income taxes are also climbing, especially in the top income brackets, where most of the income tax is paid. Withheld individual income and payroll taxes are rising by a strong 8 percent, but such taxes that are not withheld from paychecks are soaring by 20 percent.

These taxes are paid by high-income individuals, small businesses, partnerships, hedge funds, subchapter S corporations and limited liability corporations.

As the income tax relies increasingly on high-income earners - the top 20 percent pay nearly 85 percent of the income tax, according to the Congressional Budget Office - economists say it becomes much more sensitive to the stock market. When the stock market is rising, tax receipts move up sharply as they are now; when the market falls, as it did in 2001, receipts plummet.

"It's certainly good news this year, but one cannot reasonably expect corporate income taxes to grow at double-digit rates forever," Holz-Eakin said.

The same goes for personal income taxes, he said. "We're seeing again what we experienced in the late 1990s, which is a tax system that relies heavily on the upper end of the income distribution is very volatile," Holz-Eakin said. "It went away in the '90s and I think it would be prudent to assume that this might not be permanent either."

Republicans said the increases validate Bush's tax cuts, especially the 2003 tax cuts that reduced rates on income taxes, capital gains and dividends.

White House budget chief Rob Portman said the federal budget deficit has now fallen to 2.3 percent of the economy from its peak at 4.5 percent in 2004, and is now in line with the historical average. Portman said the administration will hit its goal of halving the 2004 deficit a year ahead of time.

Democrats said $300 billion deficits are nothing to crow about.

"Despite the administration's spin, the truth is that the projected budget deficit is still the fourth largest in American history," said Rep. Mike Thompson, D-Calif. "A nearly $300 billion budget deficit two years before millions of Baby Boomers begin to retire is absolutely nothing to celebrate."

Bush acknowledged that the deficit reduction is short term and that entitlements have to be reined in.

"We need to do something about it, is what we need to do," Bush said.

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