South-Westerns' Economic News Summaries
Tax Revenues on the Rise
Subject Tax Revenues
Topic Taxes Spending and Deficits
Key Words

Taxes, Tax Revenues, and Budget Deficits

News Story

President Bush opened his administration with a budget surplus of more that $100 billion, but that surplus quickly deteriorated with the wars in Afghanistan and Iraq. Shortly after taking office in 2001, President Bush was facing deficits, with the war on terror as well as an economy that was slipping into recession. Budget deficits continue to rise over the next three years, reaching $412 billion in 2004. This was nearly 3.5 percent of the gross domestic product.

The Bush administration took what many call a "supply side" approach to the recession. Also referred to as "Reaganomics," the concept of reducing taxes and increasing business incentives posits a direct relationship between lower tax rates and faster economic growth. The idea is to lower taxes, not only on consumer incomes but also on business entities. The reduced business taxes are intended to stimulate investment and to improve economic growth.

Mr. Bush cites the expected 2005 increased tax revenues as validation for his argument that the tax cuts would stimulate the economy and ultimately help pay for themselves. "Revenues are coming in greater that anticipated," he said. "It's a sign that our economy is strong, and it's a sign that our tax relief plan, our pro-growth policies, are working."

The budget deficit--the difference between government spending and tax revenues--for the first nine months of 2005 was $251 billion. This is $76 billion lower that the $327 billion deficit recorded a year ago. The Congressional Budget Office estimated that the deficit for the full fiscal year, which reached $412 billion in 2004, could be "significantly less than $350 billion, perhaps below $325 billion."

Tax revenues are running nearly 15 percent higher than in 2004. The surprise arises in corporate tax revenue, which has soared about 40 percent after languishing for four years. Individual tax revenue is up as well. Ben S. Bernanke, who took over this month as chairman of President Bush's Council of Economic Advisers, stated, "One consequence of strong income growth is that we are enjoying higher-than-expected levels of tax collections."

Critics of Mr. Bush's fiscal policies point out that the budget outlook seems good only in comparison to a year ago. They remind the country that Bush started his administration with a budget surplus. "It's only good if you set the bar at $400 billion," said Richard Kogan, senior economist at the Center on Budget and Policy Priorities. A $300 billion deficit was "really bad if you remember that we've recovered from a recession and you think we are at or near full-employment."

The immediate threat to continued reduction in the deficit would be the war in Iraq, the cost of which is on track to pass the $200 billion mark in 2005. Others deterrents include the impending retirement of the baby boomers and their entry into the social security program, and Medicare, the government's health care program for the elderly.

White House officials announced that the deficit for fiscal year 2005, which ends in September, will be at $333 billion, much less that the $427 billion they estimated in February. Mr. Bush pledged to cut the budget deficit to about $260 by the year 2009. If current trends continue, that figure could be less than 3 percent of the gross domestic product.

Questions
1.

Discuss the notion of "Reaganomics" or "supply side economics." Did it work in the 1980s when Ronald Reagan was President?

2. Explain the difference between a budget deficit, a trade deficit, and the national debt.
3. Define the term "fiscal policy." Traditionally, how do Republicans view fiscal policy? How do Republicans traditionally view the issue of budget deficits?
Source Edmund Andrews, "Deficit to Shrink to $333 Billion Because of Extra Tax Revenue," New York Times Online, July 13, 2005.

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