Chapter
4
The Congressional Budget Office expects a slowdown in the growth of revenues in 2008, largely because overall economic growth will slow markedly. If current laws and policies remained unchanged, federal revenues would reach about $2.7 trillion in 2008, which is about 3.4 percent higher than in 2007. As a share of gross domestic product, revenues would decline slightly, from 18.8 percent last year to 18.7 percent in 2008 (see Figure 4-1). That decline in revenues as a percentage of GDP would follow three consecutive years of increases.
Total Revenues as a Share of Gross Domestic Product, 1968 to 2018
Source: Congressional Budget Office.
In CBO’s baseline projections, revenues rise to 19.0 percent of GDP in 2009 and then decline to 18.6 percent in 2010. The increase in 2009 stems largely from higher individual income tax receipts as the higher exemption amounts under the alternative minimum tax expire. The decline in 2010 occurs mainly because of falling corporate income tax receipts. After several years of very robust growth, taxable corporate profits declined in dollar terms in 2007, and CBO anticipates further declines from 2008 through 2010.
In the projections, revenues jump sharply in 2011 and 2012 upon the expiration of various tax provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. In addition, revenues continue growing faster than GDP through 2018, except in 2013, when legislated shifts in corporate payments between fiscal years decrease the growth of corporate receipts (see Figure 4-2). Because of the structure of the individual income tax system, revenues claim a higher fraction of income each year as real (inflation-adjusted) income grows. Those increases more than offset the projection of continued declines in corporate receipts as a share of GDP (itself driven by a projected decline in taxable corporate profits relative to GDP) and the downward effect on capital gains tax receipts from lower realizations relative to GDP.
Annual Growth of Federal Revenues and Gross Domestic Product, 1968 to 2018
(Percentage change from previous year)
Source: Congressional Budget Office.
Under the assumption that current laws and policies will remain the same, total revenues reach 20.3 percent of GDP in 2018, a level not reached since 2000, and prior to that, not since World War II. If the law was changed so that the expiring provisions of EGTRRA, JGTRRA, and other tax legislation were extended and the AMT was indexed for inflation, revenues would be lower—roughly 17.5 percent of GDP in 2018.
CBO has lowered its projections of revenues from those published in August 2007—by $116 billion in 2008 and between $35 billion and $44 billion each year thereafter through 2017. The largest change to the estimate for 2008 occurred because of legislation enacted in December 2007 that extended relief from the AMT for one year, leading CBO to reduce estimated revenues for 2008 by about $70 billion (and to increase its estimate for 2009 by about $19 billion). Most of the other changes to the revenue projections of five months ago reflect changes to the economic outlook. Because CBO lowered its forecast of economic growth over the 2008–2009 period, it lowered its projections of taxable incomes. In addition, a projected increase in business interest payments and a corresponding decrease in corporate profits reduced projected revenues over the 2008–2017 period because the marginal tax rates generally applied to the latter are higher than those applied to the former. (For more discussion of the changes to CBO’s revenue baseline, see Appendix A.)
Federal revenues derive from various sources: individual income taxes, social insurance (payroll) taxes, corporate income taxes, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts. Receipts from individual income taxes, which are the largest component of federal receipts, have historically accounted for much of the variation in receipts and account for most of the projected movements in receipts over the 2008–2018 period.
Between 1968 and the late 1990s, individual income taxes produced nearly half of all federal revenues andtypically claimed between 7.5 percent and 9.5 percent of GDP(see Figure 4-3). They have experienced dramatic swings recently: They reached a historical high of 10.3 percent of GDP in 2000, fell to a more-than-50-year low of 7.0 percent in 2004, and then rebounded in the past three years to reach 8.5 percent of GDP.
Revenues, by Source, as a Share of Gross Domestic Product, 1968 to 2018
Source: Congressional Budget Office.
Social insurance taxes (collected mainly for Social Security and Medicare) represent the second-largest source of revenues, accounting for about one-third of revenues. They grew as a share of GDP from 1968 to the late 1980s as a result of increases in tax rates and the tax base and since then have been relatively stable at between 6.4 percent and 6.9 percent of GDP. Corporate income taxes, the third-largest source, have averaged about 12 percent of federal revenues since 1968 and about 2.2 percent of GDP. They have fluctuated significantly over the period, however, including falling to a 20-year low in 2003, at about 1.2 percent of GDP. Strong growth since then boosted those receipts to 2.7 percent of GDP in both 2006 and 2007, the highest level since the late 1970s. Growth in those receipts over the past four years accounted for about two-thirds of the increase in total revenues as a share of GDP—from 16.5 percent in 2003 to 18.8 percent in 2007. Revenues from other taxes, duties, and miscellaneous receipts (including those from the Federal Reserve System) make up the remainder of federal revenues and recently have amounted to a little less than 1.5 percent of GDP.
In sum, over the past 40 years, social insurance taxes have grown as a share of federal revenues, while the shares for corporate income taxes and excise taxes have declined. In the late 1960s, social insurance taxes and corporate income taxes contributed similar amounts of receipts: each roughly 20 percent of total receipts, or about 4 percent of GDP. In recent years, by contrast, social insurance tax receipts have accounted for more than 30 percent of total receipts, producing at least twice as much as corporate income taxes. The contribution of excise taxes has declined from about 9 percent of revenues in 1968 to less than 3 percent today.
CBO projects that, under current law, receipts from individual income taxes will remain at 8.5 percent of GDP in 2008 and then climb to 10.9 percent in 2018, a gain of 2.4 percentage points. That increase more than accounts for the projected rise in total revenues, which are expected to climb by a smaller amount, 1.7 percentage points—from 18.7 percent of GDP in 2008 to 20.3 percent in 2018.
Of the projected increase in individual receipts relative to GDP, a little over half, or about 1.5 percentage points, results from scheduled changes in tax laws. The changes include a reduced exemption amount for the AMT beginning in 2008, followed by the expiration after 2010 of provisions originally enacted in EGTRRA and JGTRRA.
The remainder of the projected increase in individual receipts relative to GDP is largely attributable to the structure of the tax code—wherein effective tax rates rise as personal income rises—and to other factors, such as growth faster than that of GDP in distributions from tax-deferred 401(k) plans and individual retirement accounts as members of the baby-boom generation reach retirement age.1 The projected rise in effective tax rates occurs in part because of the phenomenon known as "real bracket creep," in which the growth of real income causes a greater proportion of a taxpayer’s income to be taxed in higher brackets. Over the period from 2008 to 2018, that factor causes revenues as a share of GDP to rise by about 0.6 percentage points. Another factor causing increases is that, under current law, the AMT is not indexed for inflation, so an increasing number of taxpayers will have to pay it. The lack of indexation in the AMT boosts receipts from the individual income tax relative to GDP by about 0.4 percentage points over the upcoming decade. (In addition, the AMT’s exemption levels have been temporarily increased; their scheduled decline beginning in 2008 boosts receipts further.) Projected growth in retirement incomes also leads to an increase in revenues relative to GDP of about 0.4 percentage points. Those increases in individual income tax receipts relative to GDP are partially offset by projected decreases in receipts from realizations of capital gains relative to GDP, which reduce projected revenues by 0.4 percentage points of GDP.
Consistent with an anticipated decline in corporate profits as a share of the economy, receipts from corporate income taxes are projected to fall steadily as a percentage of GDP over the next decade, reaching 1.7 percent in 2017 and 2018. In the past several years, profits have risen to levels relative to GDP not seen since the mid-1960s. Profit growth slowed markedly in 2007, and CBO expects profits to decline relative to GDP in the near term as a result of the expected economic slowdown, which normally affects profits more than other incomes. Over the longer term, profits are projected to decline relative to GDP because labor compensation is expected to climb as a share of GDP to a more historical level (lowering the capital income share of GDP), and business interest payments (which reduce profits) are expected to climb from their recent historically low levels relative to GDP.
CBO expects that the revenues arising from other tax sources combined will remain relatively stable as a share of GDP. In the agency’s projections, social insurance receipts decline just slightly, from 6.4 percent of GDP in 2007 to 6.3 percent from 2015 to 2018. Those receipts follow the projection for wages and salaries, which also decline just slightly, from 46.0 percent of GDP in 2007 to 45.8 percent in 2018.2 Other receipts fluctuate between 1.1 percent and 1.4 percent of GDP between 2008 and 2018. Receipts from excise taxes drop by about 0.1 percent of GDP over the next 10 years. In the projections, receipts from estate and gift taxes are relatively stable as a share of GDP until 2012, when they jump as scheduled changes in law return the estate and gift tax to the form that existed before the enactment of EGTRRA in 2001. Miscellaneous receipts and customs duties also remain relatively stable.
CBO’s Current Revenue Projections in Detail
According to CBO’s baseline projections, under current law most of the movement in total receipts relative to GDP from 2008 to 2018 will result from changes in individual and corporate income tax receipts (see Table 4-1). In general, other sources of revenue will be much more stable relative to the size of the economy—although scheduled changes in tax law, the general design of the taxes, movements in the tax bases that are independent of GDP, and other factors do cause some sources of revenue to grow slightly differently than GDP.
Source: Congressional Budget Office.
a. The revenues of the two Social Security trust funds (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) are off-budget.
Individual income tax receipts account for almost all of the projected increase in total revenues relative to GDP over the next 10 years. Historically, individual income tax receipts have been a key determinant of movements in total receipts. Between 1992 and 2000, they grew at an average annual rate of nearly 10 percent, reaching a historical peak of 10.3 percent of GDP (see Figure 4-3). After 2000, individual receipts fell as a share of GDP for four consecutive years. The downturn began as a result of the stock market decline and the 2001 recession and was reinforced by the tax legislation enacted in several stages between 2001 and 2004. Income growth picked up substantially in 2004, and tax receipts grew by an average of nearly 13 percent annually from 2005 to 2007. In that year, receipts as a share of GDP reached 8.5 percent.
CBO expects that individual income tax receipts in 2008 will grow at about the same rate as GDP (under an assumption that current laws and policies remain unchanged), keeping revenues at 8.5 percent of GDP. Then, CBO projects, revenues will climb relative to GDP in 2009 (in large part because of the expiration of temporary AMT provisions), stabilize again in 2010, and climb relative to GDP thereafter through 2018. The projected increase results from the structure of the income tax system and scheduled changes in tax law, including the expiration of most provisions of EGTRRA and JGTRRA in 2010. In CBO’s projections, individual income tax receipts reach a new peak of 10.4 percent of GDP by 2014 and 10.9 percent by 2018.
Projected Receipts in 2008 and 2009. The growth of individual income tax receipts, CBO projects, will slow substantially, to just over 4 percent in 2008 (see Table 4-2). In the projections, overall economic growth slows in 2008; the growth in taxable personal incomes does the same correspondingly. (Taxable personal income includes wages and salaries, dividends, interest, rental income, and proprietors’ income. For a description of taxable personal income and other components of the tax base, see Box 4-1.) CBO expects taxable personal income—as measured in the national income and product accounts—to grow by 4.4 percent in 2008, just slightly more than the expected growth of GDP, at 3.9 percent. Wages and salaries, the largest source of personal income, will grow by 4.2 percent in 2008, CBO projects, which is less than the 6.0 percent averaged over the past two years. As a result, withholding from paychecks (including both income and payroll tax withholding), which grew at an average annual rate of 6.9 percent over the past two years, is projected to grow by about 5.0 percent in 2008.
CBO’s Projections of Individual Income Tax Receipts and the NIPA Tax Base
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2013a
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2018a
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