Collapse of Stocks to Propel Deficits; Federal Budget to Miss Tax revenue.(PAGE ONE)

The Washington Times (Washington, DC), August 28, 2002 | Go to article overview
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Collapse of Stocks to Propel Deficits; Federal Budget to Miss Tax revenue.(PAGE ONE)


Byline: Patrice Hill, THE WASHINGTON TIMES

The loss of surplus revenue from taxpayers hit by the stock market's $7 trillion collapse since 2000 will affect the federal budget for years, the Congressional Budget Office said yesterday.

Deficits will linger for the next four years, and small surpluses will return by the end of the decade only if Congress holds the line against big new spending and tax cuts, the agency said in a forecast that for the first time projects massive losses of income and capital gains tax revenue from reduced stock earnings in the next decade.

"Even if the economy recovers any time soon, the stock market hasn't," said Astrid Adolfson, senior economist at McCarthy Crisanti and Maffei. "You're not going to get the benefits of stock market gains" with major indexes trading from 20 percent to 80 percent below their March 2000 highs, she said.

The congressional agency projects that the economy will recover in coming months and gradually increase the revenue reaped by the government. But even so, it foresees a permanent reduction of $60 billion to $75 billion a year in receipts for "technical" reasons that appear to be mostly related to stocks.Many top-earning business executives, who pay a large share of U.S. income taxes, in recent years have been paid mostly in stock options, which are taxed as ordinary income. They often earned bonus income in the form of stocks, which are taxed as capital gains.

The CBO noted that income from stock options appears to have dropped 50 percent last year, while capital gains distributions by stock mutual funds plummeted 80 percent. Typical taxpayers also benefited from such stock gains - and paid taxes on them - during the boom years.

Congress, which has been laying plans for another year of double-digit spending increases, for years was able to indulge because of pleasant revenue "surprises" that emerged each April with last-minute payments of taxes on stock-related income.

Now, Congress is faced with an unpleasant - and long-lasting - revenue surprise that reverses much of the trend that created the huge surpluses of as much as $236 billion between fiscal 1998 and 2001, the CBO said.

President Bush and Republican leaders have said the increasingly dim budget outlook, with about $5 trillion of the CBO's projected 10-year surpluses disappearing through "technical" revisions just in the past year and a half, calls for a return to discipline and tough spending trade-offs.

Congress will no longer be able to shower increased funding on favored and neglected programs, including education and mass transit. And big tax cuts beyond the $1.2 trillion in rate reductions last year also appear beyond reach.

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