On the eve of OMB's release of its supplemental update of the FY 2007 budget, commonly known as the Mid-Session Review, many in the budget policy community awaits its revised estimates of the budget deficit, receipts, outlays, and budget authority for fiscal years 2007 through 2012. Some will point to the federal government's deficit of $123 billion for the first nine months of fiscal year 2007 as a sign of sustained progress toward a balanced budget, confirming the soundness of the Bush administration's fiscal policies. Others say the new estimates are nothing to get too excited about and disconfirm as much as they confirm about the administration's fiscal rectitude. A CBPP report released today makes the following key points about tax policy and the short-term narrowing of the federal budget deficit: Apart from the stronger economy, several other factors also have helped increase revenues since 2003. But these factors appear to have been independent of the capital gains and dividend tax cuts, and in some cases they reflect developments for which supporters of these tax cuts are unlikely to want to claim credit.

• A recent Congressional Budget Office analysis attributes a significant share of the remaining revenue growth (the growth not due to a growing economy) to a large increase in the share of national income going to corporate profits. When corporate profits increase at the expense of other forms of income, some of which are not subject to tax or are taxed at very low rates, revenues rise. In addition, new data ... show that the share of the nation's pre-tax income going to the top 1 percent of households jumped dramatically between 2003 and 2005 (the latest year for which data are available). Increased income concentration tends to raise revenues because it puts more income in the hands of those who pay taxes at higher rates.