The Congressional Budget Office projects that total federal revenues will be about $2.2 trillion in 2010, a 3.3 percent increase from 2009, under the assumption that current laws and policies will remain in effect. As a share of gross domestic product, revenues will edge up slightly, from a nearly 60-year low of 14.8 percent in 2009 to 14.9 percent in 2010 (see Figure 4-1). CBO expects that about 60 percent of the increase in federal revenues will come from increased remittances from the Federal Reserve System to the Treasury; those payments will rise markedly because of the Federal Reserve’s recent actions to stabilize financial markets to support the economy. According to CBO’s projections, revenues other than those remittances will increase by only 1.3 percent in 2010, about a percentage point less than the anticipated increase in GDP.
Several tax provisions enacted over the past decade are set to expire in December 2010. Because of those expirations and a strengthening economic recovery, CBO projects that revenues will increase substantially after 2010, rising by about 23 percent in 2011 and by another 11 percent in 2012, to reach 18.8 percent of GDP in 2012 (see Figure 4-2). The expiration of tax provisions accounts for about two-thirds of the increase in CBO’s baseline projection of revenues relative to GDP between 2010 and 2012.1 Most of the provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are set to expire, as are the Making Work Pay tax credit (enacted in the American Recovery and Reinvestment Act of 2009) and many other provisions. In addition, temporary relief from the individual alternative minimum tax expired at the end of 2009; the step-up in AMT liability will have its largest effect on revenues starting in 2011.
Revenues are projected to grow faster than GDP in 2011 and 2012 for three additional reasons. First, the experience of previous downturns indicates that, as economic activity picks up and prices of financial assets rise, wage and salary income, corporate profits, and other types of taxable incomes are likely to grow more rapidly than is GDP. Second, the recession led to a temporary acceleration of tax payments because taxpayers were slow to adjust withholding as tax liabilities fell; CBO estimates that this factor raised receipts in 2008 but should reduce them in 2010. Payments in 2011 and 2012 should return to a more normal relationship with tax liabilities. Third, CBO anticipates that the unexplained recent weakness in individual and corporate income taxes—beyond that attributable to available economic data—will gradually fade.
According to CBO’s baseline projections, revenues will continue rising from 2013 through 2020 (the end of the projection period) to reach 20.2 percent of GDP. Growth in individual income tax receipts accounts for almost all of the increase, mostly because real (inflation-adjusted) growth in income will push more income into higher tax brackets and because inflation will increase revenues from the AMT (see Figure 4-3).
However, if the expiring provisions of EGTRRA, JGTRRA, and other tax legislation were extended and if the AMT was indexed for inflation, revenues would be substantially lower than those shown in CBO’s baseline projections. Instead, revenues would rise more slowly relative to GDP in 2011 and 2012 and would reach roughly 17.5 percent of GDP in 2020.
(Percentage of gross domestic product)
Source: Congressional Budget Office.
CBO’s projections for revenues from 2010 to 2013 are a little lower than those that it published in August 2009: by about $90 billion in 2010, by about $45 billion in 2011 and 2012, and by just a slight amount in 2013.2 The downward revisions, amounting to about 2 percent of revenues projected over that period, primarily reflect smaller-than-anticipated collections for corporate and individual income taxes since August; whatever factors generated this weakness are assumed to dissipate slowly during the next five years, and tax receipts are expected to return to their historical relationships to taxable incomes. Revenue over the period from 2014 to 2019 has been revised upward by about $75 billion per year (about 2 percent), on average, relative to CBO’s projections in August 2009. Higher projected corporate profits are responsible for much of the revision in 2014 and 2015, and higher projected wages and salaries are the dominant factor for 2016 and beyond. Legislation enacted last fall also contributed to those changes, causing CBO to reduce its revenue projections by $44 billion for 2010 but to raise them by the same amount for the rest of the projection period. (For a more detailed discussion of the changes to the revenue projections, see Appendix B.)
Federal revenues come from individual income taxes, social insurance (payroll) taxes, corporate income taxes, excise taxes, estate and gift taxes, remittances from the Federal Reserve, customs duties, and miscellaneous fees and fines. Individual income tax receipts are the largest source of federal revenue, averaging about 45 percent of the total during the past 40 years. Those receipts and receipts from corporate income taxes (which are the third-largest source of revenue) have accounted for most of the historical variation in total revenues, and they account for most of the projected changes in revenues between 2010 and 2020.
Since 1970, total revenues have averaged just above 18 percent of GDP; they reached a high of 20.6 percent in 2000 and fell to a low of 14.8 percent in 2009. Receipts from individual and corporate income taxes have been especially volatile during the past 15 years or so. Between 1992 and 2000, individual income tax receipts grew at an average annual rate of nearly 10 percent, reaching a peak of 10.2 percent of GDP in 2000 (see Figure 4-3). For the four years after 2000, individual receipts declined as a share of GDP, falling to 6.9 percent of GDP by 2004. The downturn in revenues began as a result of the stock market decline and the 2001 recession, and it was reinforced by tax legislation enacted between 2001 and 2004. Income growth picked up substantially in 2004, and individual income tax receipts increased by an average of nearly 13 percent annually from 2005 to 2007; the 2007 mark of 8.4 percent of GDP roughly matches the average since 1970. Since 2007, the recession and financial crisis, as well as the legislative responses to those problems, caused individual tax receipts to fall markedly. In 2009, individual receipts totaled just 6.4 percent of GDP, the lowest share since 1950.
Annual Growth of Federal Revenues and Gross Domestic Product, 1970 to 2020
Source: Congressional Budget Office.
Receipts from corporate income taxes averaged slightly more than 2 percent of GDP from 1995 to 2000, but then fell to 1.2 percent of GDP in 2003. Corporate income tax receipts rose sharply after 2003, reaching 2.7 percent of GDP in 2006 and 2007 and accounting for more than half of the increase in total receipts relative to GDP between 2003 and 2007. Just two years later, in 2009, corporate tax receipts dropped to 1.0 percent of GDP, the lowest percentage since the 1930s. That variability over the past decade and the 55 percent decline in corporate receipts in 2009 have several sources: changes in corporate profits from current production relative to GDP; fluctuations in the effective tax rate on profits arising from changes in capital gains realizations, deductions for bad debts, the mix of profitable and unprofitable firms, and other factors; and changes in tax law, particularly the rules for depreciation of equipment that businesses purchase.
Receipts from social insurance taxes (the second-largest source of federal revenue) have been more stable relative to the size of the economy than have receipts from income taxes, fluctuating between 6.2 percent and 6.8 percent of GDP since the mid-1980s. During the preceding quarter century, social insurance taxes had claimed a steadily growing share of GDP, largely because of legislated increases in tax rates and bases. Revenues from the remaining sources (other taxes, duties, remittances, fees, and fines) have declined relative to GDP during the past 40 years, primarily because of the steady decline in excise taxes relative to GDP. Revenue from those sources totaled 1.1 percent of GDP in 2009.
CBO projects that total federal revenues will rebound sharply from the current historically low amounts relative to GDP starting in 2011. Much of that increase stems from individual income tax revenues, which—in CBO’s projections under current law—will remain low relative to GDP at 6.5 percent this year but climb sharply to reach 9.1 percent of GDP in 2012 and 10.9 percent of GDP by 2020 (see Table 4-1). Social insurance receipts are projected to edge down in 2010 relative to GDP but to rebound in 2011 to average 6.3 percent of GDP through 2020, the same share seen during the past five years. Corporate income tax receipts also are projected to remain low relative to GDP in 2010, at 1.0 percent, but then to rise to 2.2 percent of GDP in 2014 before declining to 1.8 percent of GDP in 2020. Revenues from the remaining sources are projected to measure 1.4 percent of GDP in 2010, because of temporary increases in Federal Reserve remittances, and to slip to 1.3 percent of GDP from 2013 to 2020.
Revenues, by Source, 1970 to 2020
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Individual income tax receipts account for four-fifths of the projected increase in total revenues relative to GDP over the next 10 years. Almost half of the increase in those receipts relative to the size of the economy results from the currently scheduled expiration of a host of tax provisions. The rest results from such factors as the recovery from the recession in the near term and structural features of the individual income tax system over the longer term.
Projected Receipts from 2010 Through 2012. Individual income tax receipts will grow by 3.3 percent in 2010, after declining in 2008 and 2009, according to CBO’s baseline projection (see Table 4-2). That growth stems largely from the effects of the Economic Stimulus Act of 2008 (ESA) and ARRA, both of which lowered receipts in 2009 relative to 2010. ESA provided rebates to taxpayers, reducing revenues largely in 2008 but also in 2009; and the partial expensing provisions of ARRA will reduce individual income tax receipts (by cutting the taxable incomes of noncorporate businesses) by a smaller amount in 2010 than in 2009. Taxable personal income, as measured in the national income and product accounts (NIPAs), a broad indicator of the tax base for individual income taxes, is projected to grow by just 0.3 percent in 2010, well below the 2.5 percent expected growth of GDP. Taxable personal income includes wages and salaries, dividends, interest, rental income, and proprietors’ income. Wages and salaries, the largest source of personal income, will grow by 0.9 percent in 2010, CBO projects, and withholding for income and payroll taxes is likely to follow a similar path.
Individual income tax receipts are projected to surge by 33 percent in 2011 and by 14 percent in 2012. The increases are generated partly by faster growth in taxable personal income (2.9 percent in 2011 and 5.4 percent in 2012) as the recovery strengthens. The more important causes, however, are the scheduled changes to tax rules, including the expiration of higher exemption amounts for the individual AMT and the expiration after 2010 of provisions originally enacted in 2001 in EGTRRA, in 2003 in JGTRRA, and in 2009 in ARRA.
Source: Congressional Budget Office.
Note: Receipts from the Federal Reserve and other receipts, consisting of fees and fines, are combined in a category called "miscellaneous receipts" in the federal budget.
a. Revenues generated for the two Social Security trust funds (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) are off-budget.
Scheduled Changes in Tax Law. Expiration of higher exemption amounts for the AMT in 2010, and the expiration of provisions in EGTRRA, JGTRRA, and ARRA in 2011, will increase individual income tax receipts, especially in 2011 and 2012. CBO projects that those changes account for about 2.0 of the 2.6 percentage point increase in individual income tax revenues relative to GDP from 2010 through 2012 (see Box 4-1).
Under current law, the expiration of the higher exemption amounts for the AMT after 2009 will boost revenues sharply in 2011, increasing revenues as a share of GDP by about 0.4 percentage points. In February 2009, the Congress increased the AMT exemption amounts for 2009 to keep the number of taxpayers affected at about 4 million, roughly the same as in 2008. The tax relief expired at the end of December 2009, and although relief from the AMT has been renewed in the form of an annual "patch" since 2001, the baseline reflects tax law as it currently exists. As a result, CBO projects that the number of taxpayers affected by the AMT will jump to about 27 million in 2010 and that tax liabilities from the AMT will rise sharply (see Figure 4-4).3 Therefore, CBO projects that receipts from the AMT will jump from $40 billion in 2010 to $103 billion in 2011.4 CBO expects that the additional AMT liability from 2010 will be paid almost entirely in 2011 because many taxpayers will be unaware of the change or might expect lawmakers once again to raise the AMT’s exemption amounts temporarily. Even those taxpayers who anticipate and plan for the expiration might use the safe-harbor provisions in the tax code to delay payments without penalty until 2011.5
CBO’s Projections of Individual Income Tax Receipts and the NIPAs Tax Base
Source: Congressional Budget Office.
Notes: The tax base in this table (taxable personal income) reflects income as measured by the national income and product accounts rather than as reported on tax returns. An important difference, therefore, is that it excludes capital gains realizations.
NIPAs = national income and product accounts; GDP = gross domestic product.
a. Measures expressed in billions of dollars are the cumulative amounts over the period. Measures expressed as a percentage of GDP or taxable personal income are averages over the period. Measures expressed as annual growth rates are the average rates compounded annually over the period, including growth in 2011.
The expiration of provisions in EGTRRA, JGTRRA, and ARRA will increase receipts in both 2011 and 2012. Most of the effect stems from the impending increases in statutory tax rates on ordinary income, capital gains, and dividends, as well as a contraction of the tax brackets and standard deductions for joint filers to less than twice those for single taxpayers. The rest results from a smaller child tax credit, an end to the Making Work Pay tax credit, and other scheduled changes.
The increase in the tax rate for capital gains realizations, which is scheduled to take effect in 2011 after the lower rates enacted in JGTRRA expire, will reduce capital gains realizations but increase overall income tax revenues from capital gains, CBO projects.6 Because taxpayers tend to realize fewer gains at higher tax rates, those higher rates reduce the long-run average amount of gains relative to the size of the economy. However, higher tax rates also increase the amount of revenue collected on a given amount of realizations. The former effect only partially offsets the latter, so the net effect of the increase in capital gains tax rates will be to increase revenues from that source despite somewhat lower realizations.7
Other Factors. CBO projects an increase of 0.6 percentage points in individual income tax receipts as a share of GDP between 2010 and 2012 from other factors, the largest of which is an acceleration of the payment of taxes during the recession. Many taxpayers might not have adjusted their withholding in response to declining liabilities for tax years 2008 and 2009. Because those taxpayers had more withheld from their wages than they needed to pay in taxes—that is, their "overwithholding" was more than normal or their "underwithholding" was less than normal—they received abnormally large refunds (or made smaller payments) upon filing their taxes.8 CBO projects that receipts will be lower in fiscal year 2010 both because of the large refunds paid to such taxpayers for their 2009 taxes and because many taxpayers will adjust their withholding and estimated tax payments to more closely match their actual liabilities for 2010. CBO projects that taxpayers will receive smaller refunds in fiscal year 2011 because they will not be overwithheld more than normal for the previous year, thus boosting receipts relative to 2010.
Another factor is that the unexplained weakness in recent receipts, which is beyond what can be accounted for in current economic data, is assumed under CBO’s baseline to gradually dissipate over the next several years. That assumption causes projected tax revenues to grow relative to the size of the economy by 0.2 percentage points between 2010 and 2012. In addition, growth of personal income (especially wages and salaries) relative to GDP, rising real income (which will cause more income to be taxed in higher tax brackets), and an expected increase in taxable pension distributions as the population ages, are projected to cause receipts to rise relative to GDP between 2010 and 2012.
Increases in capital gains realizations, in the absence of the effects of the impending changes in tax rates, will also boost revenues relative to GDP over the next two years, CBO projects. Capital gains realizations declined by an estimated 46 percent in calendar year 2008 and by an additional 16 percent in 2009, reflecting recent economic turmoil and steep declines in the stock and housing markets (see Table 4-3). However, strong growth initially in corporate profits and then in business and residential fixed investment is projected to drive a rebound in realizations of capital gains between 2009 and 2012. By that time, realizations are projected to be near their long-term historical average ratio of realizations to GDP, adjusted for the tax rate on gains. In CBO’s projections, that ratio stays roughly the same through 2020.
Projected Receipts Beyond 2012. In CBO’s baseline projections, revenues from personal income taxes rise as a share of GDP (and as a share of taxable personal income) in each year of the projection period after 2010, reaching 10.9 percent of GDP by 2020—or 4.4 percentage points higher than is projected for 2010 and 1.8 percentage points higher than is projected for 2012. Several factors contribute to that increase.
Characteristics that are inherent in the individual income tax system will cause average tax rates (taxes as a percentage of income) to rise after 2012, thereby increasing the receipts generated by a given amount of economic activity. Real bracket creep, in which the growth of inflation-adjusted income causes more income to be taxed in higher tax brackets, will cause a projected 0.9 percentage point increase relative to GDP from 2013 through 2020 (in addition to an increase of about 0.1 percentage point between 2010 and 2012). Real bracket creep occurs because the income tax brackets are indexed for price inflation but not for income growth in excess of inflation. Also, the individual AMT is projected to claim a growing share of rising nominal income because it is not indexed for inflation. That trend would hold even without the scheduled expiration of the higher AMT exemption in 2010, which itself is expected to boost receipts sharply in 2011. The rising share of income subject to the AMT, excluding the effects of the scheduled changes in law, will cause revenues relative to GDP in CBO’s baseline projections to increase by 0.2 percentage points from 2013 to 2020.
Effect of Expiring Tax Provisions on CBO’s Revenue Baseline
| In preparing its revenue baseline, the Congressional Budget Office (CBO) assumes that current law remains in effect. Thus, CBO assumes that most current tax provisions expire as scheduled and that no additional legislation is enacted.1 Under that framework, the baseline serves as a neutral benchmark that legislators and others can apply as they assess the potential effects of changes in policy. The scheduled expiration of tax provisions has substantial consequences for CBO’s baseline projections, especially after 2010, when most provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are scheduled to expire. Altogether, CBO projects that expiring tax provisions will increase revenues by about 2.7 percentage points of gross domestic product (GDP) between 2010 and 2012 (see the table to the right) and that the revenue share of GDP will stay approximately at that higher level until the end of the projection period in 2020.2 The scheduled expiration of lower tax rates on individual income, initially enacted in 2001, will lead to the largest increase in revenues relative to GDP—about 1.3 percent of GDP between 2010 and 2012. The expiring tax provisions include the establishment of the 10 percent tax rate bracket, which under current law will revert to 15 percent in 2011; lower statutory tax rates of 25, 28, 33, and 35 percent, which will revert to rates of 28, 31, 36, and 39.6 percent; the expanded 15 percent tax bracket and the standard deduction for married couples, which after 2010 will contract to less than twice those for single taxpayers; the reduced top tax rates of 15 percent on long-term capital gains realizations and dividends, which will return to the pre-2003 rates of 20 percent for capital gains and 39.6 percent for dividends; and the end of the phaseout of itemized deductions and personal exemptions for higher-income taxpayers, with the phaseout returning after 2010. In addition, the temporary "AMT patch," enacted in 2001 to hold down the number of taxpayers affected and then extended annually, expired at the end of 2009. The largest revenue-increasing effect of that change will be seen in 2011 because of the lag between the year in which AMT liabilities increase (2010) and the year in which taxpayers are likely to pay those taxes (2011). CBO’s baseline also projects an increase in individual income tax revenues after 2010 as the child credit reverts from $1,000 to $500, the amount in effect before EGTRRA was enacted. The expiration of that provision contributes to increases in revenues of about 0.1 percent of GDP. The Making Work Pay tax credit (up to $400 for single taxpayers and $800 for married couples), which was enacted in the American Recovery and Reinvestment Act of 2009 (Public Law 111-5), also expires after 2010, increasing projected revenues by about 0.3 percent of GDP. The Worker, Homeownership, and Business Assistance Act of 2009 temporarily expanded the ability of businesses to use recent losses to obtain refunds of taxes paid in the past. That provision reduces CBO’s baseline projection of corporate income tax revenues by about 0.2 percent of GDP in 2010 but produces a small increase in revenues in 2011 and 2012, when fewer losses are available to be carried forward, yielding an increase in revenues of about 0.3 percent of GDP from 2010 to 2012. As a result of legislation enacted in 2001, estate tax rates have steadily declined and the effective exemption amount has increased, culminating in the repeal of the estate tax and a reduction in gift tax rates in 2010. However, those changes are themselves slated to expire at the end of the year, when estate and gift tax provisions revert to the rates and exemption amounts scheduled for 2011 before the 2001 legislation was enacted. As a result, CBO projects, estate and gift tax revenue will increase by more than 0.1 percent of GDP between 2010 and 2012 and by almost 0.2 percent of GDP over the 10-year projection period. Numerous other provisions of law set to expire in 2010 or 2011 result in baseline projections of increased revenues for the next decade; the expiration of those provisions adds revenues equal to 0.6 percent of GDP from 2010 to 2012. Among the expiring provisions are the tax credit for first-time homebuyers, the partial expensing of investment in equipment, the deferral of business income arising from debt reacquisition, income and excise tax credits for ethanol-blended motor fuels, preferential rules for recognizing active financing income from international sources, the tax credit for research and experimentation, the exclusion from taxation of a portion of unemployment benefits, subsidies for unemployed workers who pay premiums to continue their health insurance, and the additional standard deduction for property taxes. Some of those provisions, such as the research and experimentation credit, have existed for many years and have been extended routinely. Others, such as the health insurance subsidies, have only recently been enacted. Contributions to the Increase in Baseline Revenues from 2010 to 2012
 Source: Congressional Budget Office. Notes: Estimates do not include effects on outlays for refundable credits. EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001; JGTRRA = Jobs and Growth Tax Relief Reconciliation Act of 2003; ARRA = American Recovery and Reinvestment Act of 2009; WHBAA = Worker, Homeownership, and Business Assistance Act of 2009. a. Includes the alternative minimum tax. An exception is made for expiring excise taxes dedicated to trust funds, which CBO assumes are extended at current rates. The estimates do not include budgetary effects that would result from the influence of those provisions on the broader economy. The estimates also do not include the effects on outlays for refundable tax credits. |
Effects of the Individual Alternative Minimum Tax in CBO’s Baseline
(Percent) (Billions of dollars)
Source: Congressional Budget Office.
Note: The alternative minimum tax (AMT) requires some tax-payers to calculate the tax they owe using a more limited set of exemptions, deductions, and credits than is applicable under the regular individual income tax. See Congressional Budget Office The Alternative Minimum Tax, Issue Brief (January 15, 2010).
a. Based on the calendar year.
Taxable income growth also raises receipts from individual income taxes relative to GDP after 2012. Taxable distributions from certain tax-deferred retirement accounts, such as traditional individual retirement accounts and 401(k) plans, are expected to increase as the population ages, raising individual income tax receipts relative to GDP by 0.3 percentage points in CBO’s projections. Contributions to those accounts were exempt from taxation when they were made initially, thus reducing the amount of taxable income reported to the Internal Revenue Service (IRS) in earlier years. As retirees take distributions from those accounts, the money becomes taxable. In addition, revenues are projected to increase by another 0.2 percentage points relative to GDP as a result of rising interest income, dividends, and income from wages and salaries.
Finally, CBO’s projection assumes that the gradual tapering off of the unexplained weakness in recent receipts, relative to available economic data, will increase revenues relative to the size of the economy by 0.2 percentage points between 2012 and 2016 (in addition to the increase of 0.2 percentage points between 2010 and 2012).
After temporarily dipping slightly in 2010 and 2011, social insurance taxes are projected to remain steady at 6.3 percent of GDP in 2012 and thereafter, the same as the percentage recorded in 2009 (see Table 4-4). Relative to wages and salaries, the appropriate tax base for those payroll taxes, social insurance taxes are projected to decline to 13.7 percent in 2010 but then to rebound to 14.1 percent in 2011 before declining gradually to 13.8 percent by 2020.
Sources of Social Insurance Revenues. The largest sources of social insurance tax revenues are payroll taxes for the Social Security program (specifically, the Old-Age, Survivors, and Disability Insurance, or OASDI) and Medicare’s Hospital Insurance program (also called Part A). A small share of such revenues comes from unemployment insurance payroll taxes and from contributions to federal retirement programs (see Table 4-5). The premiums for Medicare Part B (the Supplementary Medical Insurance program) and Part D (the prescription drug program) are considered offsets to spending because participation in those programs is voluntary; therefore, those funds are considered offsetting receipts on the spending side of the budget and do not appear on the revenue side of the budget.
Social Security and Medicare payroll taxes are calculated as a percentage of earnings—15.3 percent for the two taxes combined. The Medicare tax (1.45 percent of earnings paid by the employer and by the employee) applies to all earnings, whereas the Social Security tax (6.2 percent of earnings paid by the employer and by the employee) applies only up to a taxable maximum that is indexed to the growth of average earnings over time. Receipts from OASDI taxes will remain fairly stable relative to the size of the economy, as long as earnings remain a stable percentage of GDP and the distribution of earnings remains relatively unchanged.
Actual and Projected Capital Gains Realizations and Tax Receipts
Source: Congressional Budget Office.
Notes: Capital gains realizations are the sum of net capital gains from tax returns reporting a net gain.
Data for gains realized after 2007 and data for tax receipts in all years are estimated or projected by CBO.
Data for gains realized before 2008 are estimated by the Treasury Department.
CBO’s Projections of Social Insurance Tax Receipts and the Social Insurance Tax Base
Source: Congressional Budget Office.
Notes: The tax base in this table (wages and salaries) reflects income as measured by the national income and product accounts rather than as reported on tax returns.
a. Measures expressed in billions of dollars are the cumulative amounts over the period. Measures expressed as a percentage of GDP or wages and salaries are averages over the period. Measures expressed as annual growth rates are the average rates compounded annually over the period, including growth in 2011.
Payments for social insurance and individual income taxes are combined when employers make payments throughout the year. Employers are later required to report to the Treasury Department the breakdown for the two sources. The distribution of receipts for the individual income and payroll taxes is estimated initially by the Treasury Department and corrected later. CBO’s baseline projection anticipates an adjustment to the allocation of receipts in 2010 to correct an overstatement of social insurance receipts in prior years, which will cause a dip in social insurance receipts as a percentage of wages and salaries and as a percentage of GDP in 2010. That adjustment by the Treasury Department is expected to reallocate about $18 billion of social insurance receipts in 2010 to individual income taxes; the adjustment has no effect on total revenues.
Projected Receipts. Social insurance receipts are projected in CBO’s baseline to decline slightly as a percentage of GDP, from 6.3 percent in 2009 to 6.0 per cent in 2010. About half of that change is the result of the allocation adjustment just discussed. The other half is attributable to a decrease in wages and salaries as a percentage of GDP. Social insurance receipts also will decline as a percentage of earnings between 2009 and 2010, almost entirely because of the allocation adjustment.
Social insurance tax receipts are projected to increase to 6.2 percent of GDP in 2011 and to 6.3 percent from 2012 to 2020. The stable revenue share reflects the offsetting effects of increases in wages and salaries relative to GDP and decreases in social insurance receipts as a share of wages and salaries throughout that period. Receipts fall as a share of wages in part because the share of earnings above the OASDI taxable maximum will continue to drift higher and thus the share of earnings subject to the OASDI tax will fall over time.9 CBO also projects slower growth in unemployment insurance receipts because states will only gradually replenish unemployment insurance trust funds that have been depleted by the recession.
CBO’s Projections of Social Insurance Tax Receipts, by Source
Source: Congressional Budget Office.
Receipts from corporate income taxes account for about one-sixth of the projected increase in total revenues relative to GDP over the next 10 years. Between 2009 and 2014, corporate tax receipts are projected to rise from 1.0 percent of GDP to 2.2 percent of GDP, spurred by a rebound in profits during the expected economic recovery and by an end to legislative and other factors that have reduced corporate receipts during the past few years. During the remainder of the 10-year projection period, declines in profits relative to the size of the economy are expected to reduce corporate receipts to 1.8 percent of GDP by 2020.
Projected Receipts from 2010 Through 2012. Corporate tax receipts in CBO’s projections generally follow the pattern projected for taxable corporate profits. CBO makes several adjustments to profits from current production (economic profits) as measured in the NIPAs to estimate taxable corporate profits, which more closely approximate the tax base. Those adjustments include the following: substituting CBO’s estimates of past and future tax depreciation for the depreciation used in measuring economic profits that more closely matches the loss in value of capital in the production process; subtracting profits of S corporations, which generally are smaller businesses that satisfy certain criteria and elect to have their profits taxed immediately to the owners under the individual income tax, rather than first at the corporate level and again at the individual level when disbursed as dividends; subtracting profits earned by U.S. corporations abroad and adding earnings by foreign corporations on their U.S. operations; and adding realizations of capital gains.
CBO projects that corporate income tax receipts will rise in dollar terms in 2010, increasing by 6.1 percent to $147 billion (see Table 4-6) but remaining near 1.0 percent of GDP. CBO expects that profits will increase sharply in 2010, stemming from the effects of economic recovery and the expiration at the end of 2009 of provisions that allowed businesses to partially expense (immediately deduct from taxable income) 50 percent of investments in equipment. (Those provisions were enacted for 2008 in ESA and renewed through 2009 in ARRA.) However, corporate income tax receipts will rise much more slowly in 2010 than will profits, in part because the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) expanded the "carryback" period for net operating losses.10 Based on estimates by the staff of the Joint Committee on Taxation at the time of enactment, CBO projects that the expanded carryback window will reduce 2010 receipts by about $33 billion. Provisions in ARRA that relate to the deferral of income from the cancellation of indebtedness also are projected to reduce corporate tax receipts in 2010 relative to 2009.11 In addition, because corporate income tax payments through December 2009 have remained below those observed in 2008, despite taxable profits that CBO estimates rose above the prior years’ amounts by the end of 2009, growth of corporate receipts is expected to remain sluggish in 2010.
CBO’s Projections of Corporate Income Tax Receipts and Tax Bases
Source: Congressional Budget Office.
Notes: The tax bases in this table (corporate economic profits and taxable corporate profits) reflect income as measured in the national income and product accounts rather than as reported on tax returns.
a. Measures expressed in billions of dollars are the cumulative amounts over the period. Measures expressed as a percentage of GDP or taxable profits are averages over the period. Measures expressed as annual growth rates are the average rates compounded annually over the period, including growth in 2011.
b. Taxable corporate profits are defined as economic profits plus economic depreciation minus book depreciation; minus profits earned by the Federal Reserve System, transnational corporations, and S corporations; and minus deductible payments of state and local corporate taxes. They include capital gains realized by corporations and profits from inventory revaluation.
Corporate receipts are projected to jump to 2.0 percent of GDP by 2012 as a result of the expiration of the carryback provisions, the waning effects of the cancellation-of- indebtedness provision, and an increase in profits relative to GDP through 2011. In addition, CBO projects that the recent weakness in collections that is not explained by available data on corporate profits and other measures used in forecasting receipts will gradually wane between 2010 and 2014.
Projected Receipts Beyond 2012. Corporate income tax receipts will remain near 2.1 percent of GDP in most years between 2012 and 2017 in CBO’s baseline projection. Receipts are projected to increase more than usual in 2014, to 2.2 percent of GDP, and to decline in 2015 to 2.0 percent of GDP, partly because of a provision in WHBAA that shifts about $18 billion in corporate tax payments into 2014 that otherwise would have been made in 2015. Without the timing shifts, receipts would be 2.1 percent of GDP between 2013 and 2015.
Corporate tax receipts are projected to decline to 2.0 percent of GDP between 2016 and 2017 and then to slip further, to 1.8 percent of GDP by 2020, in line with the share recorded in the early 1990s. That pattern largely reflects a slight decline in corporate taxable profits relative to GDP as interest payments of corporations rise because of higher interest rates.
Receipts from federal excise taxes are projected to continue their long-term decline as a share of GDP, edging down from 0.5 percent in 2010 to 0.4 percent during the latter part of the 10-year projection period. Most excise taxes—those that generate more than 80 percent of total federal excise tax revenues—are levied either on each unit of good or on the transaction rather than as a percentage of value. Thus, excise tax receipts grow with increases in real output, but they do not grow as quickly as nominal GDP because they do not rise as prices increase.
Most excise taxes fall into one of four major categories: those associated with highway use, tobacco purchases, airport and airway use, or alcohol purchases (see Table 4-7). Almost half of all excise receipts come from taxes dedicated to the Highway Trust Fund—primarily taxes on gasoline and diesel fuel, including blends of those fuels with ethanol. Receipts from highway taxes are expected to decrease by 1 percent in 2010, which would mark the fifth consecutive year of declining revenues from that source. CBO projects that aggregate consumption of motor fuel—gasoline, ethanol, and diesel—will hold nearly steady in 2010, but that highway tax receipts will be depressed by an increase in the consumption of ethanol-blended fuels, which are taxed at a lower effective tax rate than gasoline. Highway tax receipts are then projected to increase at an average annual rate of more than 10 percent in 2011 and 2012 before settling into an average growth rate of about 1.5 percent for the remainder of the projection period. Only a small portion of the large increase in 2011 and 2012 can be attributed to increased fuel usage, as aggregate fuel consumption is projected to rise by an average of 1 percent in those years. Instead, the jump in receipts is driven mostly by changes in the taxation of ethanol-blended fuels. The expiration of lower effective tax rates on those fuels during fiscal year 2011 is projected to generate about $5 billion in additional revenue per year.
The economic downturn caused a significant decline in air travel in 2009, leading to a drop of more than 10 percent in aviation tax receipts. CBO expects that those receipts will decline again in 2010, by a little more than 2 percent, a rate consistent with air traffic data through the early part of the year. CBO projects that aviation revenues will increase in subsequent years, at an average annual growth rate of more than 5 percent from 2011 to 2020. That growth rate exceeds the growth rate for real GDP in the same period because the main components of aviation excise taxes are levied as a percentage of dollar value, so receipts increase with inflation. Most of those taxes are scheduled to expire on March 31, 2010, but as specified in the Balanced Budget and Emergency Deficit Control Act of 1985, CBO assumes in its baseline that expiring excise taxes dedicated to trust funds will be extended.12
Tobacco tax receipts are projected to increase by just under $5 billion (or 34 percent) in 2010, the first full year after the Children’s Health Insurance Program Reauthorization Act of 2009 increased tax rates on tobacco products. Those tax increases, which became effective in April 2009, included a 62 cent per pack increase in the excise tax on cigarettes. Tobacco tax revenues are projected to fall by a little more than 1 percent per year in 2011 and beyond, which is consistent with the long-term historical decline in tobacco consumption.
CBO’s Projections of Excise Tax Receipts, by Category
Source: Congressional Budget Office.
CBO projects that receipts from alcohol taxes will rise by about 2 percent per year through 2020. That growth is roughly in line with the rate of growth of real GDP over that period.
CBO’s baseline projections also reflect changes in other excise taxes. In March 2009, an IRS ruling stated that a chemical known as black liquor was an eligible fuel under the alternative-fuel mixture credit, and producers could receive a refundable excise tax credit worth 50 cents per gallon of fuel produced. Black liquor is a by-product of the paper-milling process, and the ruling allowed firms that produce the chemical to claim the credit. The IRS paid more than $4 billion in such claims for the credit in 2009, and CBO estimates that another $1 billion to $2 billion in refunds was made after the end of the fiscal year and before the credit expired on December 31, 2009. Along with the increase in tobacco tax revenues, the expiration of the alternative-fuel mixture credit explains much of the growth of nearly 13 percent projected for excise tax receipts in 2010.
Receipts from estate and gift taxes under current law will fall from 0.2 percent of GDP in 2009 to 0.1 percent of GDP in 2010 and 2011 and then increase to 0.2 percent in 2012 and 0.3 percent of GDP thereafter, according to CBO’s baseline projections. That projection reflects major changes in those taxes under current law: The estate and generation-skipping transfer taxes were eliminated for 2010 but will be reinstated (at rates higher and exemption amounts lower than those of recent years) in 2011, when EGTRRA’s provisions related to estate and gift taxes expire. The gift tax remains in place in 2010, with a tax rate of 35 percent on gifts that exceed the $1 million lifetime exemption. Under current law, starting in 2011, the estate, generation-skipping transfer, and gift taxes will have a top marginal tax rate of 55 percent and an effective exemption amount of $1 million.13
CBO’s projections of estate and gift tax receipts take into account the incentives provided by the repeal and then the reinstatement of the estate and generation-skipping transfer taxes. EGTRRA gave taxpayers an incentive to make taxable gifts in 2010, when the gift tax rate is 35 percent, instead of making them in earlier or later years, when the tax rates are higher. Because gift tax liabilities are typically paid in April of the year after the gift is made, CBO projects that gift tax receipts will be much higher than usual in 2011, reflecting the large number of taxable gifts made in 2010. CBO projects that estate tax receipts in 2011 will be about $1.2 billion and will result primarily from late tax payments from the estates of those who died in 2009, because the estate tax will not be in effect in 2010 under current law.14 After 2011, estate and gift tax receipts will return to roughly the same share of GDP as that seen in the early 1970s, according to CBO’s baseline projection.
Receipts from the Federal Reserve System
The earnings of the Federal Reserve System are counted as revenues when they are remitted to the Treasury. The amount of those remittances reflects the income generated by the various activities of the Federal Reserve less the cost of generating that income. Federal Reserve income has a variety of sources: interest on Treasury and other securities the Federal Reserve holds, interest on loans to banks, fees on services rendered to banks, and gains (or losses) on holdings of foreign-denominated assets. The Federal Reserve pays interest—currently at a rate close to the federal funds rate—on reserves held at the Federal Reserve by depository institutions. Because it pays no interest on currency (Federal Reserve notes) in circulation, which normally is the Federal Reserve’s largest liability, income typically well exceeds costs. (The Federal Reserve’s actions also clearly influence revenues from all sources by affecting the economy overall.)
In the face of the most severe financial crisis since the Great Depression, the Federal Reserve has taken extraordinary measures to stabilize financial markets. Starting in 2007, it began to provide additional liquidity to depository institutions by extending existing mechanisms; one example is the provision of longer-term loans through the "discount window."15 The size of the Federal Reserve’s asset portfolio did not increase immediately because it simultaneously reduced its holdings of Treasury securities. By September 2008, however, deteriorating conditions in credit markets led the Federal Reserve to provide additional liquidity to financial markets through several new programs without offsetting the impact on its balance sheet by significantly reducing its holdings of Treasury securities. As a result, the Federal Reserve’s portfolio grew rapidly, more than doubling to about $2.3 trillion by the end of December 2008, and it remained above $2 trillion throughout most of 2009. Despite the expanded portfolio, remittances from the Federal Reserve to the Treasury did not increase immediately—largely because the initial methods of providing liquidity did not earn returns substantially above the rate paid by the Federal Reserve to obtain the funds. Therefore, remittances in 2009, which totaled $34 billion, remained at about 0.2 percent of GDP, the same as in the seven years prior.
CBO’s baseline projection shows remittances more than doubling in 2010 and 2011—to more than $70 billion annually or 0.5 percent of GDP (see Table 4-8). That increase is attributable to the Federal Reserve’s purchase of longer-term and riskier securities—in support of the housing market and the broader economy—that have a significantly higher expected return than the rate on the reserves used to finance them. Beginning in January 2009, the Federal Reserve significantly ramped up its purchases of agency debt: It purchased securities from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Its holdings of such securities reached roughly $900 billion by the end of 2009. The Federal Reserve also purchased additional long-term Treasury securities; those holdings rose by about 80 percent in 2009 to reach about $350 billion by the end of December, and they yield higher returns than shorter-term Treasury securities.
On the basis of announcements by the Federal Reserve, CBO anticipates that the size of the Federal Reserve’s portfolio will peak in 2010 and gradually decline thereafter. As a result, remittances to the Treasury will fall to 0.3 percent of GDP in 2012 and will remain at about 0.2 percent through the rest of the 10-year projection period, according to CBO’s baseline projections.
Customs duties and other miscellaneous receipts yielded only about 2 percent of total revenues, or about 0.3 percent of GDP, in 2009. CBO projects that receipts from those sources will remain fairly steady as a share of GDP throughout the 10-year projection period.
Effects of Expiring Tax Provisions
CBO’s baseline revenue projections are based on the assumption that current tax laws will remain unaltered and thus that the provisions currently scheduled to expire will do so. The one exception involves the expiration of excise taxes dedicated to trust funds; under the rules that CBO follows in its baseline projections, those taxes are assumed to continue regardless of whether they are scheduled to expire.
CBO’s Projections of Other Sources of Revenue
Source: Congressional Budget Office.
a. Fees on certain telecommunications services finance the Universal Service Fund.
CBO’s baseline projections reflect the expiration under current law of roughly 150 tax provisions, almost all of which would reduce revenues if they were extended. CBO and the staff of the Joint Committee on Taxation estimate that if all of the tax provisions that are assumed to expire in the baseline were extended, projected deficits would be higher than in the baseline by about $56 billion in 2010, by $341 billion in 2011, by $492 billion in 2012, and by increasing amounts throughout the 10-year projection period, reaching $675 billion in 2020.16 For the entire period from 2011 to 2020, deficits would increase by about $5.6 trillion.17 Those estimates do not include the effects on debt service or on the economy of extending the provisions. Most of the budgetary effects would be on federal revenues, but extending the provisions also would affect outlays for refundable tax credits.18
From a budgetary perspective, the most significant expiring provisions are those originally enacted in EGTRRA and JGTRRA and amended by several other laws. Several provisions that combine to produce significant budgetary effects are set to expire at the end of the current calendar year: They involve reduced tax rates on dividends, capital gains, and ordinary income; a higher child credit; the elimination of the estate tax; and an expanded standard deduction and an increase in the size of the 15 percent tax bracket for married couples. If the expiring provisions originally enacted in EGTRRA and JGTRRA were extended, CBO and the staff of the Joint Committee on Taxation estimate that budget deficits would increase by about $2.6 trillion from 2011 through 2020 (excluding the effects on debt service). That amount includes about $2.3 trillion in lower revenues and more than $200 billion in higher outlays.19
Another expiring provision with a significant budgetary effect is the current AMT patch. The estimated effects described above include about $530 billion for extending the exemption at the 2009 levels and another $530 billion for an interaction between extending those exemption amounts and the provisions of EGTRRA and JGTRRA that affect individual income taxes (with both figures excluding the effect on debt service). The interaction results because the number of taxpayers subject to the AMT is higher if the EGTRRA tax provisions are extended. Because the exemption amounts for the AMT would not increase with inflation, the number of taxpayers subject to the AMT would increase over time—albeit by many fewer than if the temporarily higher AMT exemption amounts were allowed to expire.20
The remaining provisions consist of a broad range of tax legislation that, if extended, would reduce baseline revenue projections by a total of almost $2 trillion over the period from 2011 to 2020 (excluding the effect on debt service). The largest effects stem from extending the Making Work Pay tax credit ($571 billion), the partial expensing of investment property ($301 billion), and the first-time homebuyer credit ($178 billion).
The provisions also affect revenues by influencing the broader economy (see Chapter 2). Although those effects are incorporated into baseline revenue projections, they are not identified separately in this chapter.
Congressional Budget Office, The Budget and Economic Outlook: An Update (August 2009).
According to projections made on the basis of current law, the number of taxpayers with AMT liability will dip temporarily in 2011, as will the amount of AMT receipts in 2012, because of increases in regular tax rates and other changes that result from the expiration of provisions originally enacted in EGTRRA and JGTRRA.
For a more thorough discussion of the expanding scope of the AMT under current law and the types of taxpayers affected, see Congressional Budget Office, The Individual Alternative Minimum Tax, Issue Brief (January 15, 2010).
For example, taxpayers with income below $150,000 can avoid penalties by making estimated payments and withholding amounts equal to their prior year’s tax liability. Taxpayers with income above $150,000 can avoid penalties by paying at least 110 percent of their prior year’s liability.
A capital gains realization is the increase in the value of an asset between the time it is purchased and sold.
The scheduled return to higher tax rates on capital gains in 2011 also will alter the timing of realizations by encouraging taxpayers to sell assets that will generate taxable capital gains in 2010, before the rates go up, rather than waiting until 2011.
Taxpayers are considered overwithheld for a year if their tax liability is less than the combined amount of income taxes withheld from their paychecks and any estimated taxes paid to the Internal Revenue Service in quarterly installments.
That effect contributes to projected increases in individual income tax receipts that more than offset the decline in receipts from social insurance taxes.
Tax law allows businesses to receive refunds in the current year for tax payments in past years by carrying back current-year losses for up to two years to offset earlier tax liability. WHBAA temporarily allowed all businesses to choose to carry back such losses for up to five years and to receive refunds in 2010. Businesses that take advantage of that provision will have fewer losses to use to offset future tax liability, and receipts will increase more in future years than they would have without the expanded carryback window. Tax law also allows businesses that experience losses during economic downturns to reduce their tax liability in future, profitable, years by carrying forward their losses during the downturn and deducting them from later taxable income. WHBAA did not change the carry-forward provision in current law.
The provision generally allows corporations that buy back their debt in 2009 or 2010 for less than the issue price to defer for several years including the gain in taxable income.
Although the provisions of the Balanced Budget and Emergency Deficit Control Act of 1985 that pertain to the baseline expired on September 30, 2006, CBO continues to follow that law’s specifications in constructing its baseline.
In years after 2010, a 5 percent surtax also will be imposed on wealth transfers between $10.0 million and $17.184 million, resulting in an effective marginal tax rate of 60 percent for transfers in that range.
For a more comprehensive discussion of projections for estate and gift taxes as they are affected by changes in tax law, see Congressional Budget Office, Federal Estate and Gift Taxes, Issue Brief (December 18, 2009).
The discount window usually extends short-term credit to depository institutions facing temporary shortages in liquidity.
The estimates of extending the expiring provisions are consistent with the effects on the baseline of assuming that the provisions will expire (see Box 4-1).
A table, "Effects of Extending Tax Provisions Scheduled to Expire Before 2020," appears as a Web supplement to this report.
Refundable credits reduce a taxpayer’s overall tax liability; if the credit exceeds that liability, the excess may be refunded, in which case it is classified as an outlay in the federal budget.
When this report went to press, only rough preliminary estimates based on CBO’s new economic forecast were available for the impact of extending certain provisions, including various individual income tax provisions of EGTRRA and JGTRRA that are scheduled to expire at the end of 2010 and changes to the exemption amount under the AMT that expired at the end of 2009. CBO will make the updated estimates from the Joint Committee on Taxation available when they are completed.
See Table 1-5 for the budgetary effects of selected policy alternatives not included in CBO’s baseline, including the effects of reforming the AMT by indexing its higher exemptions and tax brackets for inflation. That policy change would reduce the number of taxpayers that might become subject to the AMT over time by more than would extending the AMT’s exemptions at their 2009 amounts.
