Surprising Jump in Tax Revenues Is Curbing Deficit "An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief." NYTimes July9, 2006 http://www.nytimes.com/...
Wow! As an economics graduate student and instructor, this front page headline and first sentence really grabbed my attention. Is it possible that the supply-siders and Republicans are right and that slashing marginal income tax rates on the wealthiest Americans and corporations actually increases tax revenues, a theory sometimes referred to as the Laffer curve? If so that would be quite a story because every single macroeconmics textbook I have says that is not the case and every single economics professor at my university thinks that is not the case. History also holds that cuts in tax rates do not increase government revenues. So if this were true that would be quite a story and I would have to eat my words to my Fox-news watching brother. However, after reading the article my economics worldview was still in tact, as was my very dim view of MSM economics journalism.
My biggest problem is with the headline and the fact that the article is front loaded with the Administration spin. Although I think the author makes a good faith effort to be fair in the body of the text, the emphasis is all wrong.
Economics as Spin: There is plenty of information in the body of the article and in the Federal Budget Tables that belies the headline. There is also a lot of evidence that Administration officials contacted the NYTimes in advance of the release of the actual numbers on Tues. to put their spin on the numbers and extend the coverage of the phony good news. Here are some examples of spin followed by a debunking.
Spin: On Tuesday, White House officials are expected to announce that the tax receipts will be about $250 billion above last year's levels and that the deficit will be about $100 billion less than what they projected six months ago.
Debunking This is a classic administration trick that plays on the incompetence of the media in covering economics stories. Paul Krugman pointed out years ago that this Whitehouse's OMB makes highball near term deficit forecasts (but lowball longterm forecasts) so that no matter how high the deficit is the headlines will be that the deficit was lower than expected.
If we look at the longterm forecasts a different pattern emerges.
Budget Year | Forecasted Deficit or Surplus for 2006 |
2002 | 304 bil surplus |
2003 | 86 bil surplus |
2004 | 200 bil deficit |
2005 | 267 bil deficit |
2006 | 390 bil deficit |
According to the article congressional analysts say the deficit could be less than 300 billion this year. So hey, the budget deficit for 2006 might only be about 600 billion dollars higher than was forecast in the first budget Bush submitted in 2002, and might only be about 100 billion dollars higher than the 2004 budget predicted. So what if the deficit for 2006 might be 100 billion lower than was projected 6 months ago?
Spin: Tax revenues are climbing twice as fast as the administration predicted in February, so fast that the budget deficit could actually decline this year.
Debunking Even if the deficit declines somewhat this year from last year the deficits will still be much higher than when Bush came into office. From the Historical Tables of the Whitehouse's proposed budget for 2007:
128 billion dollar surplus in 2001, 157 billion dollar deficit in 2002, 377 billion dollar deficit in 2003, 412 billion dollar deficit in 2004, 318 billion dollar deficit in 2005.
Furthermore, everything will go to hell when the baby boomers start becoming eligible for social security within the next couple of years.
"The long-term outlook is such a deep well of sorrow that I can't get much happiness out of this year," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a former White House economist under President Bush. ---buried in body of the article
Spin: Corporate tax payments are expected to exceed $300 billion, up from $131 billion three years ago.
Debunking The article later makes clear that corporate tax revenues and the non-payroll income tax receipts from executive bonuses and investment income that are behind the current increase in tax revenues are very volatile. This unexpected windfall in revenues can vanish as quickly as it appeared.
Cynical Spin: Pat Toomey, president of the Club for Growth, a conservative political fund-raising group, said: "The supply-siders were absolutely right. All the major sources of revenue have grown, especially in areas where we said they would."
Debunking: Democrats and many independent budget analysts note that overall revenues have barely climbed back to the levels reached in 2000, and that the government has borrowed trillions of dollars against Social Security surpluses just as the first of the nation's baby boomers are nearing retirement.
"The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan."
Furthermore,
"Despite almost five years of economic growth, individual income taxes -- the biggest component of federal tax revenues -- have yet to reach the levels of 2000. Even with surging payments for investment profits and business income, individual tax payments in 2005 were only $972 billion -- below the $1 trillion reached in 2000, even without adjusting for inflation.
Notice that most independent budget analysts agree with the Democrats. Even one of Bush's former economic advisors was quoted saying "the long-term outlook is such a deep well of sorrow..." Yet the headline and the emphasis is on a blip in the tax receipts from corporations and the very wealthiest Americans. Worst, the completely discredited economic theory that tax-cuts increase tax revenues- is presented in the context of another he said/ she said argument between Democrats and Repbublicans.
Finally a shameless plug:
Bush Himself May Have Divulged Critical OBL Intelligence and there is overwhelming evidence that he must have authorized the "torrent" of leaks in Bush at War.
http://www.dailykos.com/...
The diary is too long so you can just read the blockquotes for the important info.
I cannot for the life of me figure out why the Dems don't use this for a knowckout punch to Bush's and the Republicans credibility. This goes well beyond plamegate and what Murray Waas printed about Bush's possible involvement there.