CBO Says Smaller Deficit Projected for 2007; Rising Income Tax Revenues Cited

August 24, 2007

The Congressional Budget Office has released new deficit numbers for the fiscal year 2007, which ends on Sept. 30th. From CBO:

The nation’s budget outlook for fiscal year 2007 has improved in the five months since the Congressional Budget Office (CBO) released its previous set of baseline projections, but prospects for the long term remain daunting. CBO now expects that the budget deficit for 2007 will total $158 billion-$19 billion lower than the estimate published in March and about $90 billion less than the budget shortfall recorded last year. Relative to the size of the economy, the 2007 deficit is expected to equal 1.2 percent of gross domestic product (GDP), down from 1.9 percent in 2006. Over the longer term, however, the federal budget continues to face substantial fiscal challenges, driven primarily by rising health care costs.

The publication goes on to mention that higher-than-expected individual income tax collections are to credit for the lower deficit. Rapidly growing corporate tax revenues had been the main driver of the surge in revenue since the recession six years ago.

The CBO also expects a budget surplus by FY 2012 when the tax cuts passed in 2001 and 2003 are set to expire. However, that hinges on what fraction of the tax cuts are made permanent, and if they’re not fully extended, which parts of the tax cuts are extended. It is likely that the politically popular provisions of the tax cuts (like the child tax credit and elimination of the marriage penalty on the standard deduction) would produce the least feedback in terms of economic growth. The rate cuts, which tend to be the least politically popular part of the cuts, would likely provide the most feedback, although the feedback is nowhere close to 100 percent of the tax cut.

To read the full report, click here. One important note is that CBO’s scores for all years assume current law baseline and thereby ignore any tax cuts or tax hikes that could change the deficit numbers. This includes the assumption of no patch to the Alternative Minimum Tax.

For more on dynamic scoring and the Laffer Curve, check out our previous blog posts on the issue here, here, and here.

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