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If Government Raises More Revenue, Does it Make a Sound?

Joseph Hines

A little-noticed CBO report yesterday, part of their Monthly Budget Review, found that the US has raised substantially more revenue this year than the last, while federal spending remained about the same. Whereas last year, the budget totaled $1.1 trillion by July, this year it’s only $975 billion. The deficit’s been cut by an unexpected spike in tax revenue. Specifically, the CBO found that “receipts in the first 10 months totaled $2.0 trillion, $114 billion more than those in the same period last year.” 

So where’s that extra revenue coming from? 

  • $42 billion from corporate taxes. They’re up 30% from 2011. 
  • $37 billion from individual tax receipts. They’re only up 4 percent, but just a little increase from everyone's tax revenues has a huge effect.  
  • $26 billion from social insurance taxes. A portion of this growth was due to expiring unemployment insurance claims for the long-term unemployed. That’s not exactly heartening.
  • $9 billion from random sources. Gift and estate taxes were higher this year. 

There you go, $114 billion. That’s a significant number when you consider how hard it is to get similar deficit reduction from spending cuts. For example, it's more than the dreaded sequestration cuts of $109 billion per year (on average) that are slated to kick in next year And it’s the result of just mild changes in our economic condition. Even a small uptick in tax receipts has a huge impact on the federal deficit. 

People forget just how much the huge recent deficits are the result of the Great Recession and how quickly an economic rebound could help close these gaps. In 1998, the last time the U.S. ran a surplus, it seemed to happen overnight. Really, it was the result of increased revenues from higher demand and employment.

Washington has been so obsessively focused in the past year on reducing the deficit by spending cuts or tax increases that there's been little discussion of the best strategy for curbing deficits: economic growth.

Of course, that's exactly what we have been saying all along. Put promoting growth ahead of deficit reduction and you'll end up solving the U.S.'s fiscal problems as a matter of course. A demand-driven crisis calls for stimulus, and the CBO report is further evidence of how a virtuous economic cycle is the best antidote to red ink.