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ROBERT SIEGEL, host:

The White House says that, thanks to its policies, tax revenues are rising fast and as a result the deficit is coming down, in the short run, at least. Office of Management and Budget Director Rob Portman tells the Washington Times today that, compared to last year, tax revenues are up more than 10 percent. And the deficit for the first three quarters of this fiscal year was about $208 billion, that's down from almost $250 billion during the first three quarters of last year. OMB Director Portman gives the administration's policies a pat on the back for that.

We're going to check in now with a former Bush White House economist, Douglas Holtz-Eakin, who is now a fellow at the Council on Foreign Relations. Welcome to the program.

Mr. DOUGLAS HOLTZ-EAKIN (Fellow, Council on Foreign Relations): My pleasure.

SIEGEL: According to the New York Times over the weekend, it's corporate taxes, individual taxes on stock market profits and taxes on big executive bonuses that are all going up. What does that say to you?

Mr. HOLTZ-EAKIN: I think this is good news. It's hard to be disappointed that, for a tax system that we expected to result in a deficit that was something like $360 billion, we're quite likely to have a deficit that's below $300 billion. The obvious question is, can it last? And what should we think about this from the point of view of the budget policy going forward.

SIEGEL: And the obvious answer is?

Mr. HOLTZ-EAKIN: Well, to the extent that for every dollar of income we get more in taxes, we'll get higher tax revenues going forward. And that would be very good news over the long term.

However, it's important to take this with a grain of salt. We've seen this kind of behavior before, notably in the late 1990s. Because the U.S. income tax system centers heavily on high-income people and corporations, it comes with the volatility of their operations. If bonuses go away, so do the revenues; if profits go down, so do the revenues.

And so you've got to take it with a grain of salt and be cautious and remember that, over the real long term, it's the retirement of the Baby Boom and the programs that they participate in, Social Security, Medicare and Medicaid, that will determine the budget outlook.

SIEGEL: Well, does a budget deficit over the course of a fiscal year of $300 billion as opposed to $400 billion, does it make a difference in the American economy? Does anybody feel that difference?

Mr. HOLTZ-EAKIN: It makes a little bit of a difference. It will lower the demands of the Treasury on private financial markets, free up $100 billion to either not borrow it from abroad or to provide more capital investment in the United States. A little less pressure on interest rates so that everyone else is buying a house, buying a car, doing some remodeling, they face a little less in the way of pressure. The real good news is if you could say, well, instead of $300 billion this year and maybe more in the future, we're going to have $300 billion this year and a lot less of a deficit in the future, that would make a big difference.

SIEGEL: And is there anything in the numbers that suggest that one could say that right now?

Mr. HOLTZ-EAKIN: No. Unfortunately, the big problems are on the other side of the ledger. They're on the spending side, and this doesn't change the basic profile for the big programs that we spend a lot of money on. Defense, in the near term, and then past that, the entitlement programs that everyone's heard so much about.

SIEGEL: I want you to go back to something you said a moment ago, that the income tax relies very, very heavily on the wealthy; that is, as opposed to the FICA tax that hits everybody and is not a very progressive tax. The income tax really does; it's paid mostly by the rich.

Mr. HOLTZ-EAKIN: Half of Americans don't pay any income tax, or in fact get money back. And the top 5 percent are paying half of it. So it's centered very much on the fortunes of a few Americans and if they have any kind of financial volatility, we get volatility in the revenue system.

And we've seen that in the late 1990s. A lot of options, a lot of bonuses, a lot of money for the government. Then it all went away. So one thing to be careful about is not to bank on this kind of revenue increase for every year in the foreseeable future.

One of the things that's interesting about this year and is cause for optimism is that it's across-the-board strength. We're seeing plain vanilla FICA taxes, plain vanilla income taxes being withheld by corporations, also showing considerable strength. What that may mean is that there's a little more income out there in the economy than our other measures are suggesting, like the Payroll Employment Board thinks it looks weak. Well, maybe it's stronger than we think.

SIEGEL: Douglas Holtz-Eakin, thank you very much for talking with us.

Mr. HOLTZ-EAKIN: My pleasure.

SIEGEL: That's Douglas Holtz-Eakin, who was a former director of the Congressional Budget Office and before that, chief economist at the Council of Economic Advisors at the Bush White House.

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