Call it Operation Enduring Tax Cuts. President Bush's $2.9 trillion fiscal 2008 budget attempts to balance the federal budget by 2012. According to the proposal, the U.S. government would run a $61 billion surplus that year, though the projected deficits in 2010 ($94.4 billion) and 2011 ($53.8 billion) would be so small relative to the size of a projected $18 trillion economy0.6 percent and 0.3 percent of gross domestic productas to be financially insignificant. (And yes, bean counters of America, these numbers do assume that Social Security surpluses are commingled with the rest of tax revenues.)
The nonpartisan Congressional Budget Office also shows the budget moving into balance after 2010, but there is a key difference from the Bush budget: The CBO assumes the 2001 and 2003 Bush tax cuts will expire, thereby bringing in a load of new tax revenue. The Bush budget assumes the tax cuts stay in place. How does Bush propose to move Uncle Sam into the black? By slowing spending growthhe wants to hold nonsecurity, nonentitlement discretionary spending to 1 percent annual growthand assuming slightly higher GDP growth of 3.0 percent vs. 2.8 percent over the next five years than the CBO does.
The big red flags in the Bush plan are: 1) getting congressional approval; 2) dealing with the future costs of the Iraq war, which are predicted to plunge after 2008; and 3) assuming that Congress won't permanently fix the alternative minimum tax.
Yet a continuing faster-than-expected pace of tax revenue growth may still allow the budget to be balanced before 2012. For 2006, tax receipts of $2.4 trillion were 11.8 percent greater than in 2005, and in 2005 receipts were 14.5 percent higher than in 2004. The budget conservatively projects future revenue growth that averages 5.4 percent over the next six years, about equal to the projected overall growth in the economy.
Yet again so far this year, the government is taking in way more in tax receipts than expected. Receipts in January came in at a 13 percent year-over-year pace. As an analysis from Action Economics concludes, "Even though the CBO knocked down its [fiscal 2007] deficit forecast by a hefty $114 billion just two weeks ago [to $172 billion], it already appears that their new revenue forecasts are unrealistically pessimistic." And after crunching the numbers, economist Brian Wesbury of First Trust Advisors found the following:
Our models expect average tax revenue growth of 9 percent over the next three years and spending growth of between 4 percent and 5 percent. This will generate a well below consensus deficit in FY07 of just $115 billion. Next year in FY08, we forecast a deficit of only $35 billion. On a 12-month basis, we suspect that the budget will move into balance early in FY2009, well before the Office of Management and Budget or the Congressional Budget Office expect.
If he is right, good luck to any 44th president if he or she decides to make the case that the Bush tax cuts should be left to expire at the end of 2010. Past tax hikes have occurred during times of big budget deficits. If there is no deficit, how will any president argue that the government should take even more of voters' incomes? Of course, the next president could contend that the tax cuts need to expire in order to deal with the growing financial woes of Social Security and Medicare. But if that sort of long-term argument actually worked with the American public, there wouldn't be any entitlement problems to begin with.