The unexpected jump in tax receipts projected for the fiscal year ending in September provides additional momentum for real tax reform, according to observers.
Aided by the April surge in tax receipts, the Bush administration is now projecting a budget deficit for fiscal 2005 of $333 billion - $94 billion less than its February forecast and $79 billion less than 2004's deficit.
The administration attributes the figures to President George W. Bush's pro-growth policies, including tax relief, which they say have resulted in steady job growth and economic expansion. The budget deficit is now forecast to continue falling to $162 billion in 2009, or 1.1 percent of gross domestic product, significantly surpassing President Bush's goal of cutting the deficit in half from its fiscal year 2004 peak of $521 billion, or 4.5 percent of GDP.
"There was excellent news on deficit reduction, with revised budget forecasts showing that the president's pro-growth policies, by stimulating economic growth, have increased Treasury receipts and therefore decreased the budget deficit," stated assistant Treasury secretary for economic policy Mark J. Warshawsky.
The fact that the administration assigns credit for the increased receipts to its economic policies may give it the confidence to propose tax reform closer to the ideal championed by supply side economists, according to Tom Giovanetti, president of the Lewisville, Texas-based Institute for Policy Innovation.
"It's yet again evidence of the power of positive changes in tax policy," he said. "It's clear that a significant factor behind the surge in revenue was the tax cuts. It happened in the 1980s - when they cut the capital gains rate, there was a surge in capital gains revenue."
"It is a vindication of supply-side economics," agreed Grover Norquist, president of Washington-based Americans for Tax Reform, formerly an economist with the U.S. Chamber of Commerce and a member of the National Commission on Restructuring the IRS. "The repatriation of earnings had a dramatic effect - that's revenue we wouldn't have otherwise. That and the cut in capital gains and faster depreciation expensing for small businesses are exactly what supply-siders say we should do all the time for everyone."
Under the American Jobs Creation Act enacted last year, U.S. companies are allowed to repatriate overseas income from their stake in foreign companies at a rate of 5.25 percent, provided that they re-invest the income in approved domestic investments.
"Everything the low-tax, pro-growth side said would happen did happen," said Norquist. "But there are guys that oppose this for ideological reasons. They don't care that the government gets more money with lower rates, because it makes them feel good to have higher rates."
Norquist believes that the President's Advisory Panel on Tax Reform is "pretty much set on where they're going. They'll come out with a plan that's close to a single rate, and reduce the double tax on savings and investment."
The goal, according to Norquist, should be to get to a single rate of tax that taxes income one time. "Right now you get taxed when you earn, again when you save, and again when you get dividends," he said. "And if you're stupid enough to die, they tax you again."
Steven J. Entin, president and executive director of the Institute for Research on the Economics of Taxation, said that the growth in revenue proves that changes to marginal tax rates do make a difference.
"I hope that the response of the economy that we are seeing will convince people that bringing rates down on capital and labor does pay dividends," he said.
A large portion of the additional revenue, he noted, was from the income of non-corporate sole proprietors and partnerships, and from non-withheld receipts from capital gains and dividends. "It all can be traced back to tax cuts. It really gives the lie to static revenue estimates, so they might be able to go a little further in reforming the tax system. Still, I wish they had controlled spending so there would be a budget surplus to spend on tax reform."
Dan Clifton, executive director of the American Shareholders Association, agreed. "Now we can get a little closer to being revenue neutral. If they want to cut the tax on savings and investment, they now have a lot of credibility that there will be feedback."
Clifton noted that the revenue scoring of tax cuts is overstated in the static analysis used by the Joint Committee on Taxation. "Despite substantial tax cuts in 2003 and 2004, tax revenues will grow by the largest amount in one fiscal year by the close of fiscal year 2005," he observed.
Estimates by the JCT have historically underestimated the growth associated with tax cuts by failing to incorporate the macroeconomic effects from the cuts, according to Clifton. "Recent history with similar tax cuts demonstrates the JCT and the Congressional Budget Office consistently overestimated the price tag of cuts passed in 1997, 2003 and 2004," he stated.
Entin, one of the first witnesses to testify before the President's Advisory Panel on Tax Reform, said that he does not expect one coherent plan out of the panel. "They will probably present a range of options. They'll say, 'These will be beneficial, these will not, here's why we think so.'"
Giovanetti likewise predicted a series of recommendations from the panel. "I expect them to recommend a move to tax consumption, but not savings and investment, and continue to do so through the tax code. There'll be a recommendation to eliminate double and triple taxation of capital, which suggests a phase-out of all tax on capital, including capital gains, interest and dividends."
He predicted that the failure of the administration to achieve a significant victory on Social Security makes tax reform more likely. "The president needs a domestic policy success, and if he's not going to get it on Social Security, he'll put more energy into tax reform," he said. "So, between the success of the tax cuts and the lack of Social Security success, the likelihood is it will focus the attention of the White House domestic policy staff on tax reform."
"What I don't expect is a move toward a sales tax as opposed to an income tax," he said. "There would be just too many hurdles to accomplish that. But it need not be a discouragement for those who want to move toward a consumption tax, because a flat tax that doesn't tax savings or investment is a consumption tax."
"The good news is that we can move from where we are without having to go to a national sales tax, and still accomplish what we want to from a macroeconomic standpoint," he added.
George Pieler, former tax counsel to the Senate Finance Committee, said that the revenue surge is a vindication of tax cutting. "It would be good to see the surge locked up and earmarked for tax reform, but if tax reform gets delayed, there's no way to hold on to the gain - timing is everything."
"In terms of the revenue surge and tax reform, the thing to watch is the death tax repeal debate," he said. "If the president signs a clean repeal of the death tax, it bodes well for the rest of tax reform. But if not and there's a compromise, it signals that they're not really interested in addressing the fundamentals of tax reform - they're just tinkering around at the margins."
