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Rising tax revenue eases pressure for budget cuts

WASHINGTON (AP) — Rising tax receipts are shrinking the federal deficit, and that will shape the budget debate when Congress returns from vacation next month. The big question for lawmakers: Should they renew, end or modify the tens of billions of dollars in “sequester” cuts in government spending that took effect earlier this year?

Tax revenue through June was up 14 percent from a year earlier, and that trend is expected to continue. New figures for July are due out next week, and for August on Sept. 12. That’s just three days after lawmakers return to face threats by some conservatives of a government shutdown on Oct. 1 or an economy-threatening default on the national debt weeks later.

With revenue rising, what’s the fight about?

Now that the government is taking in more money, Republicans in Congress are more opposed than ever to tax increases sought by President Barack Obama and his Democratic allies.

“This year the federal government will bring more revenue in than in any year in our history,” says House Speaker John Boehner of Ohio. “We have a spending problem in Washington. It has to be addressed.”

But Obama and the Democrats want to do away with some of the existing spending cuts, and they say they won’t accept significant further reductions — unless there’s also action to bring in still more revenue.

“Democrats know we must do more to reduce the deficit,” says Senate Majority Leader Harry Reid of Nevada. “We believe in a balanced approach that pairs spending cuts with having those that can afford it pay more.”

At the same time, some economists worry that currently rising revenue numbers will reduce the pressure to address the nation’s long-term debt problems.

“I don’t think political leaders feel that they have a gun to their head the way they did a couple years ago,” said William Gale, a former economic adviser to President George H.W. Bush and now co-director of the Tax Policy Center. “There’s a desire on some sides to declare ‘mission accomplished’ and ignore the long-term deficits and move on to other issues.”

Several factors are contributing to the increase in revenue. Congress increased income tax rates on high-income families in January. The Congressional Budget Office says some of those taxpayers probably cashed in investments ahead of the tax hike, boosting capital gains taxes. Congress also let a temporary payroll tax cut expire at the end of 2012, increasing Social Security taxes.

CBO also said a rise in personal income is adding to tax revenue, even though economic growth has been sluggish.

To see how important the economy is to federal tax receipts, look at what happened in 2009, after the nation plunged into the worst economic recession since the Great Depression. Income tax receipts dropped by 20 percent from the year before, and corporate tax receipts dropped by 55 percent. Social Security tax receipts dropped for the first time since 1946.

The budget deficit, which topped $1 trillion for four straight years, is projected to fall to $642 billion in the budget year that ends in September, according to the Congressional Budget Office. The spending cuts enacted over the past several years are combining with higher tax receipts to reduce government borrowing.

Under current law, the budget office projects that the federal deficit will shrink even further in the next several years before starting to grow again at the end of the decade. But with the national debt approaching $17 trillion, the long-term financial problems aren’t exactly solved, Gale said.

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