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WASHINGTON — This morning, the Congressional Budget Office (CBO) released estimates for this year’s federal deficit along with long‐term budget projections. The data proved informative but was incomplete — the success of President Bush’s tax cuts, the costs of the Iraq War and looming crises in entitlement spending were absent. Tax and budget experts from the Cato Institute clarified what the numbers really mean.
“The new CBO data show that the federal fiscal problem is not a shortage of revenues. Even with the extension of all the Bush tax cuts and continued AMT relief, federal revenues would continue to be close to the long‐run norm of 18 percent of the economy.
“CBO’s new data confirm the large dynamic effects of the capital gains tax cuts enacted in 2003. The top capital gains tax rate was cut from 20 to 15 percent, yet capital gains tax receipts have more than doubled from $50 billion in 2003 to $109 billion in 2007.
“Many on Capitol Hill claim that corporate tax loopholes are a major fiscal problem. But the CBO data show that corporate tax revenues have more than doubled since 2003 and are expected to remain at very high levels. Corporate taxes as a share of corporate profits — currently at 27 percent — are expected to rise in coming years, not fall as the critics suggest.”
Stephen Slivinski, director of budget studies and author of Buck Wild: How Republicans Broke the Bank and Became the Party of Big Government:
“The new CBO estimates might be spun by the White House as further proof that the president’s plan to balance the budget by 2012 could be a reality. But the CBO estimates contain some overly optimistic assumptions about spending. They do not include an estimate for additional future supplemental spending for the war in Iraq, for instance. And they assume that overall annual spending will only grow by an average of 3.5 percent for the next five years when the actual average growth rate of spending over the past five years has been about 7 percent each year. The CBO’s job is to estimate a business‐as‐usual baseline for spending. Unfortunately, policymakers often see their job as making sure this baseline is a floor, not a ceiling.
“The CBO report, however, also provides the statistical equivalent of a cold shower to those who insist that everything will be fine as long as we merely balance the federal budget soon. The really big problem — massive increases in spending on Social Security and Medicare over the next ten years, which are estimated to grow even by the conservative estimates of the CBO by about twice the growth of the economy — is something that deficit fetishists often ignore although doing so imperils the future health of the U.S. economy.”
Daniel Mitchell, senior fellow:
“The bad news is that the CBO report shows that federal spending has grown more than twice as fast as needed to keep pace with inflation. But there is some qualified good news. Big increases in tax revenues show that the 2003 supply‐side tax rate reductions were very effective in boosting growth and increasing economic output. The dark lining to that silver cloud is that the influx of new revenue may discourage already‐timid lawmakers from making much‐needed reductions in the burden of federal spending.”