Friday, July 14, 2006

Financial Times Editorial - Rising US tax receipts

Financial Times Editorial - Rising US tax receipts
Published: July 14 2006 03:00 | Last updated: July 14 2006 03:00
Copyright The Financial Times Limited 2006

Dick Cheney once said: "Reagan proved that deficits don't matter." George W. Bush's unusual decision to proclaim this year's stellar tax receipts from the White House's East Wing suggests a reappraisal of that philosophy.

Much of what Mr Bush said was right. This year's 13 per cent surge in revenues will reduce the fiscal deficit from an earlier projection of 3.2 per cent of gross domestic product to a more palatable 2.3 per cent. That is good news for the US and the world economy. But it would be wrong to conclude that the US ship of state is now headed for calmer fiscal waters.

The president's chief aim was in fact to bolster his campaign to convert the temporary tax cuts enacted in 2001 and 2003 into permanent reductions beyond their 2010 expiry date. It is smart politics that sends two messages: first, the numbers reassure fiscal conservatives alienated by the administration's record of rising deficits; and, second, Mr Bush's interpretation of the data rallies supply-side radicals who believe America's thumping GDP growth has been caused by the tax cuts.

The first group has scant cause for reassurance. At this (almost certainly) mature stage of the business cycle, the US should be in budget surplus as it was when Mr Bush came to office in 2001. With a net domestic savings rate at about 1 per cent, the US should be counteracting its negative household savings with public saving. It is hard to imagine an orderly winding down of America's current account deficit - now at 7 per cent of GDP - without tougher fiscal action. Tax receipts are also notoriously volatile. The latest surge was preceded by unusually anaemic revenues in 2004 and 2003 that flatter this year's numbers and make it tricky to assume they will persist. Tax receipts mostly depend on the buoyancy of a fickle stock market and on the level of corporate profits.

Nor are there good arguments to suggest America's strong growth has come primarily because of the tax cuts, which were skewed towards high earners, whose incentive to spend and invest needed no further stimulus. The economy's performance owes much more to America's strong productivity growth and - until recently - a highly accommodative monetary policy.

All of which means Washington continues to avoid the real test - tackling the looming structural deficits in entitlement spending. In contrast to tax receipts, which are hard to predict, US Social Security and health deficits will inescapably start to grow from 2010 unless there is serious reform. It is a bit like swatting flies while ignoring the large elephant in the room.


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