Tax Revenue at 44-Year Low In Proportion to U.S. Economy

[MORTARDUDE]

Tax Revenue at 44-Year Low In Proportion to U.S. Economy

The Washington Post

October 11, 2003, Saturday

Jonathan Weisman, Washington Post Staff Writer


Federal tax receipts relative to the overall economy have reached their lowest level since Dwight D. Eisenhower was president, while government spending has climbed to the highest point since Bill Clinton declared the era of big government over, according to new figures released by the Congressional Budget Office.

The CBO closed its books on the fiscal year that ended Sept. 30 with a report that presents a mixed picture of the federal government's financial position. Although it documented a large fiscal imbalance that's expected to grow, the report from Congress' nonpartisan budget scorekeeper also showed how the economy's building strength helped reduce the near-term growth rate of the federal budget deficit.

The deficit for fiscal 2003 was $ 374 billion, $ 27 billion less than the CBO forecast in August. Tax receipts, especially corporate taxes, came in stronger than expected this fall, while spending on welfare payments, health care for the needy and unemployment benefits were lower than forecast -- all signs that the economic recovery is helping the government's bottom line.

"It's early to celebrate, but there are indeed hopeful signs," said White House Budget Director Joshua B. Bolten, whose office will present its final 2003 tally later this month.

But CBO Director Douglas J. Holtz-Eakin, a former economist in the Bush White House, cautioned that there are too many questions about the recent jump in tax receipts to conclude that the government's fiscal fortunes have turned.

"We still have the same outlook for the future," he said, referring to the CBO's August projection of deficits totaling $ 1.4 trillion between 2004 and 2013.

As a snapshot of the government's fiscal health, 2003 invited historic comparisons. The $ 374 billion deficit surpassed the previous record of $ 290 billion set in 1992, although it was shy of the 1992 level after adjustment for inflation.

A sluggish economy and three successive tax cuts pushed 2003 tax receipts to $ 1.78 trillion, $ 70 billion less than in the previous year. Expressed as percentage of the economy, the federal tax take fell to 16.6 percent, the lowest level since 1959.

Tax revenue has now fallen for three successive years, which hasn't happened since the Great Depression. Since receipts peaked in 2000, they have fallen by $ 242 billion, or 12 percent.

Last year, corporate tax receipts fell by 11.1 percent, just 1.2 percent of the nation's gross domestic product. That is the lowest since 1983, and the second lowest since 1936. Since they peaked in 2000, corporate tax payments have plunged nearly 29 percent.

Individual income taxes fell by 7.5 percent last year and are off 21 percent from their 2000 peak. Only Medicare and Social Security taxes have continued to climb since the boom years of the 1990s, and that money -- which politicians pledged to save -- IS FINANCING OTHER PARTS OF THE GOVENMENT. ( MY EMPHASIS )

"It is revenue collection which dropped off a cliff," Bolten said.

Federal spending -- driven by war and rising health care costs -- has been on the opposite trajectory. Spending rose $ 146 billion, or 7.3 percent, from 2002, to $ 2.16 trillion. In 2003, spending equaled 20.3 percent of the economy, the highest level since 1996, when Clinton hailed the end of big government in his State of the Union address.

Those numbers may understate the surge in spending since historically low interest rates have cut the cost of interest payments on the $ 3.9 trillion federal debt held by the public, the CBO said. Excluding the fall in interest payments, federal spending rose 8.9 percent last year.

The two big federal health insurance programs, Medicare and Medicaid, grew by 8.4 percent in 2003, a cause for concern, Bolten conceded.

But the real driver on the spending side was the military, which consumed $ 389 billion in 2003, a 17.2 percent increase in a single year. That was the fastest growth rate in 20 years, the CBO said, and more than double the average 7 percent growth in non-defense programs.

Since Bush took office, military spending has increased 34 percent, and is up 50 percent since 1999, when military spending totaled $ 261 billion.

"There's no good news there," said Kent Conrad (N.D.), the senior Democrat on the Senate Budget Committee.

With Congress considering spending $ 87 billion on Iraq and Afghanistan, the figures are expected to rise. Bolten said he still expected the deficit to top $ 500 billion this year, even with a brightening economic picture. Strong economic growth expected next year will not produce a surge in tax receipts until 2005, he said.

Still, Bolten said, the president's expectation that the deficit will be half that size in five years now seems easily attainable.

Critics of the president's fiscal stewardship are not backing off. Bush's $ 1.7 trillion in tax cuts will really begin taking a toll on government finances toward the end of the decade, when forecasters expect the economy to be rolling, said William G. Gale, an economist at the Brookings Institution. By 2010, the tax cuts will account for nearly half the swing from government surpluses once predicted to the deficits now expected.

And by then, the vanguard of Baby Boom retirees will have begun driving up Social Security and Medicare expenses by nearly 7 percent a year.
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The 2003 numbers are "a distraction compared to the big story of where this is all heading," Conrad said. "A fiscal crisis unlike any we've ever seen."
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