The federal deficit continues to decline thanks to budget cuts and slower growth in Medicare costs, but lower than expected corporate tax revenues dimmed some of the improved outlook, according to a report Wednesday from the Congressional Budget Office.
The ability of corporations to dodge taxes, particularly by shifting their headquarters overseas, has become a heated political issue that President Obama has vowed to address this fall. This week, American fast-food giant Burger King announced its move to Canada, among the most high profile of the recent so-called corporate inversions.
Declining corporate tax revenues are largely to blame for a $26 billion dip in overall revenue projections from the non-partisan budget office’s April forecast, and the budget director called the change not particularly large, but “notable.”
“There has been, and will be, some erosion in the tax base,” said CBO Director Doug Elmendorf, who added that the dip is not fully understood but appears to be the result of companies using various legal strategies, including inversions, to postpone or avoid tax liabilities. “Mostly, companies put off paying taxes they owe,” he told reporters.
Companies have long resisted the nearly 40% corporate income tax in the United States, among the highest in the world, and many pay much less once deductions and exemptions are calculated. Firms argue that high taxes in the U.S. leave them little choice but to seek friendlier business environments abroad.
Congress has offered various proposals for lowering the corporate rate to 25%, on par with other industrialized nations. Those have failed to advance despite some agreement between Obama and Republicans in Congress that the current system should be reformed.
Wednesday’s update to the federal budget and economic outlook reflected the continued challenges facing Washington after years of fiscal battles on Capitol Hill.
At $506 billion for fiscal 2014, the federal deficit is set to decline for the fifth year in a row, and is much smaller than during the Great Recession, when revenues plummeted and federal spending was increased to stimulate the economy. The deficit for 2014 is now 2.9% of gross domestic product, down from a high of nearly 10% of GDP in 2009.
Part of the improved outlook is a result of budget cuts forced by congressional Republicans in a deal with Democrats that also raised taxes on the wealthiest households.
But perhaps more notable has been the slower growth of Medicare spending, which has long been a worrisome driver of deficits as baby boomers age and put pressure on the federal healthcare system.
Though healthcare spending continues to climb overall, Elmendorf called the projected 2% Medicare growth rate, much lower than previous years, a “striking phenomenon.”
Still, the economy continues to struggle, and the CBO revised its GDP forecast downward from 3.1% to 1.5% for 2014, “reflecting the surprising economic weakness” in the first part of the year, due largely to the unusually cold weather. Looking ahead, the budget office said GDP growth will remain below average, at 2.2%, through 2014. The unemployment rate is expected to continue to decline.
Long-term debt is expected to reach 74% of GDP this fiscal year, almost twice what it was in 2007, when President George W. Bush was in office – and the highest since 1950, the CBO said. By 2024, debt is projected to be 77% of GDP.
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Aug. 27, 2:24 p.m.: The story updated to include comments from CBO official on the effect of falling corporate tax revenue.