WASHINGTON—One day after the Bush administration announced a dramatic decline in the federal budget deficit, debate erupted Thursday over whether President Bush's tax cuts should get the credit and whether they should be made permanent.
The deficit is projected to fall this year to $333 billion from last year's $412 billion. The White House claimed its tax cuts were largely responsible for stimulating the economy and boosting revenue collection.
Experts from the Congressional Budget Office, the Government Accountability Office, the president's Council of Economic Advisers and Wall Street offer different explanations. They warn that the jury's still out and suggest that credit also should go to one-time-only tax quirks and policy decisions that keep interest rates low and the dollar weak.
No one can say for certain how much difference the tax cuts made until more years of experience unfold, but the answer is important because Bush is pressing Congress to make his 2001 tax cuts permanent.
This much is clear: Tax revenues are up sharply so far this year. Corporate tax revenues may end up 40 percent higher this year, and taxes from individuals are up so far by 18 percent. That revenue surge is reducing the federal budget deficit.
The White House contends that justifies making Bush's earlier tax cuts permanent.
"I think there's no doubt that the effect of the tax cuts ... (has) been an enormous factor in producing the additional income that has found its way into the federal treasury in the form of tax revenues," Joshua Bolten, the president's budget chief, said Wednesday.
That's far more emphatic than what the new head of the Council of Economic Advisers said a day earlier. Appearing Tuesday before the American Enterprise Institute, a conservative research center, Ben Bernanke was asked if supply-side economics explained the improving deficit outlook.
"I would say that the honest answer is we don't have full information yet," said Bernanke, who until recently was a Federal Reserve Board governor. He added that "preliminary evidence" shows that the tax cuts helped, but he cautioned that "I'm not sure we have the data" to make a definitive determination.
Robert Bixby, executive director of the Concord Coalition, a bipartisan group devoted to balanced budgets, said simple arithmetic doesn't support the basic supply-side article of faith that cutting taxes will lead to higher revenues.
"In the administration's April 2001 budget," Bixby said, "the baseline revenue projection for 2005 was $2.57 trillion. Following four rounds of tax cuts, the administration is now projecting revenues for 2005 of $2.14 trillion."
As chief investment strategist for the Wells Capital Group, a division of San Francisco-based Wells Fargo Bank, James W. Paulsen is a Wall Street heavy hitter. He's been more upbeat than most of his peers about the economy, but he doesn't credit supply-side tax cuts for its strength.
"I am not a big advocate that the tax cuts did much but do believe the economic recovery is strong because of the lagged impact of policy stimuli—monetary, dollar and `fiscal' stimuli," he said.
Translation: The Fed's policy of low interest rates has provided cheap money to fuel consumption. The Treasury Department's weak-dollar policy has boosted exports, and the big budget deficits of the past four years have spurred spending and economic growth as well.
Douglas Holtz-Eakin, director of the Congressional Budget Office, the nonpartisan economic-analysis arm of Congress, said it may take two years before there's enough data to say with certainty how much the tax cuts sparked today's revenue surge.
But he lists several other contributing factors: Executive bonuses and capital gains off last year's strong stock market are driving up individual income tax receipts; the expiration of special depreciation breaks for corporate investment in equipment led to increased business tax revenues; and aggressive efforts to close tax shelters are yielding more tax dollars.
Yet another factor is that companies enjoy a one-time tax holiday in 2005 that allows them to repatriate profits made abroad.
So, how much credit do Bush's tax cuts deserve?
"Who deserves credit for what is a very hard scientific question," Holtz-Eakin said in an interview Thursday. "There are so many moving pieces at any given time that it's just not that easy to say with precision. Anything we say now is in the category of educated conjecture."
Holtz-Eakin was Bush's top economic adviser from 2001 to 2003.
Even so, the better-than-expected deficit numbers for 2005 suggest that Bush is on target to halve the federal deficit by 2009 as he promised.
But a budget crisis still looms after that in Social Security and Medicare. The first waves of the baby-boom generation will be retiring by then, and government spending on their pension and medical needs is projected to plunge future budgets deep into the red unless big changes in policy are made.
U.S. Comptroller General David Walker, head of the General Accountability Office, a congressional watchdog agency, said Thursday that short-term deficit improvement means little compared with the projected long-term financing problems for Social Security and Medicare.
"The real problem is the long-range structural imbalance," he said. "The clock is working against us."
(c) 2005, Knight Ridder/Tribune Information Services.
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