Tax revenues are rolling in faster than some had expected, but if you thought that would trigger widespread optimism on what it says about the underlying state of economic health, think again.
Still, on the surface, at least, it all looks like a favorable trend. Ben Bernanke, White House economic adviser, suggested as much yesterday when observed that the U.S. is “enjoying is higher-than-expected levels of tax collections so far this year which, if maintained with spending controls, will reduce the government’s budget deficit for this year well below its projected level,” Reuters reports.
The White House previously had predicted a $427 billion pile of red ink in federal government deficit in the fiscal year that ends this September 30. That estimate topped the reported $412 billion deficit for 2004–a record shortfall. But the Congressional Budget Office, Reuters relates, expects the 2005 budget deficit to be materially lower, falling perhaps to under $325 billion by the more optimistic scenarios.
So what’s not to like? Plenty, according to some analysts. The Center for Budget and Policy Priorities, for instance, raises some questions as to whether the recent surge in tax revenues is a byproduct of a trend with legs. For starters, the jump in expected 2005 revenues isn’t driven by economic growth, CBPP claims in a research note published yesterday. “Economic growth in 2005 has not been unusually rapid, nor has it been stronger than was projected earlier this year. Thus, the unexpected gain in revenues does not reflect faster-than-anticipated economic growth.”
It gets worse, the think tank continues, opining that the factors behind the current elevation in revenues are “temporary,” according to CBPP. “The expiration of a business tax cut at the end of 2004 is leading to an increase in tax collections of about $50 billion this year, according to past estimates by the Joint Committee on Taxation. In this case, the increase in revenue stems from the termination of a tax cut, not from a tax cut’s effect in spurring the economy.”
Perhaps, although for the moment there’s still reason to be optimistic. After all, how many pundits were predicting last year that tax revenues would surprise on the upside in 2005? Now some are saying the new-found revenue burst isn’t long for this world. Nonetheless, even the Bush administration is staying cautious. As the New York Times today reports, Bernanke’s remaining true to his dismal science training and refraining from any cheerleading that may get him into trouble down the road. “We need to wait for more data,” Bernanke counsels.
What else is new? In the meantime, it’s still a bit easier to argue that reports of the death of supply-side economics appears greatly exaggerated for the moment. In a sign of the times, the German finance minister, Hans Eichel, gave the much-debated concept of supply side thinking a nod of approval today when said that that the country’s budget deficit as a share of GDP could fall if taxes are cut, according to AFX via Forbes.
Who would have guessed that Germany could be a breeding ground, however nascent, for Bush-like tax cuts to stimulate economic growth?