The Long-Term Outlook for Revenues

The federal government collects revenues in the form of individual and corporate income taxes, social insurance (payroll) taxes, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts. Policymakers adjust the level and composition of revenues frequently and will probably make significant changes to the tax system over the next 75 years.

Many potential paths exist for future revenues, and the total revenues assumed under any particular scenario could be generated from a variety of policies that would have very different implications for the economy and the share of income paid in taxes by people at various income levels. This analysis focuses on two potential scenarios for federal receipts. The extended-baseline scenario assumes that current law remains in place: The 2001 and 2003 tax cuts expire as scheduled, and the individual alternative minimum tax remains unchanged. Under that scenario, estimated revenues for the first 10 years of the projection period would be consistent with those in the Congressional Budget Office’s March 2007 baseline. After 2017, revenues are projected to rise relative to gross domestic product. Between 2007 and 2082, under this scenario, revenues would increase by roughly 6.5 percentage points of GDP (see Figure 5-1).

The alternative fiscal scenario starts with the tax law in place in 2007 for the individual income tax and generally assumes that law is unchanged through 2082. None of the scheduled changes in tax law beyond 2007 are assumed to take effect. This scenario also assumes that the parameters of the AMT will be indexed for inflation after 2007. Under this scenario, revenues would rise by roughly 2 percentage points of GDP between now and 2082.

Over 75 years, the cumulative effects of inflation and real (inflation-adjusted) income growth interact with the tax system in both scenarios (although to a lesser extent in the alternative fiscal scenario). The result is higher average tax rates (taxes as a share of income) and a significant change in the distribution of taxes. Under the extended-baseline scenario, the cumulative effects of inflation would push about half of all households into the AMT by 2035—and by 2082, the AMT would be the individual income tax system for over three-quarters of all households.

In the past half-century, total revenues have ranged from 16.1 percent to 20.9 percent of GDP, averaging 18.1 percent, with no obvious trend over time (see Figure 5-2). During that period, however, the various sources of revenue have changed in importance. Individual income taxes, which account for about half of all revenues, have varied between 7 percent and 10 percent of GDP. Social insurance taxes, which make up about one-third of total revenues, have grown from 2 percent to about 6.5 percent of GDP. (Those taxes consist primarily of payroll taxes credited to the Social Security and Medicare Hospital Insurance Trust Funds.) Corporate income taxes contribute about 14 percent to overall revenues and constitute 1 percent to 2 percent of GDP, down from nearly 5 percent in 1957. Revenues from other taxes and duties as well as miscellaneous receipts make up the balance—accounting for between roughly 1 percent and 3 percent of GDP over the past 50 years.

Much of the variation in the composition of total tax revenues has resulted from legislative changes, as policymakers have adjusted tax rates and other parameters of the tax system. Some of the variation, however, has stemmed from the inter action of the tax code and changes in the economy. For example, excise tax receipts have tended to decline over time as a percentage of GDP because many are specific levies (such as cents per gallon of gasoline) that are not indexed for inflation and thus have diminished in importance as the economy has experienced inflation. In contrast, income tax receipts have tended to rise relative to GDP as increases in prices have caused various thresholds in the income tax system to decline in real terms and therefore boosted the amount of income subject to taxation at higher rates.

Over the years, legislators have often changed parameters of the tax system to offset the impact of economic changes on taxes. In the case of the individual income tax, much of the system was eventually indexed to prevent inflation from raising income taxes relative to GDP. Even so, real growth results in higher average tax rates under current law as a greater share of income is taxed in higher tax brackets (a circumstance commonly known as real bracket creep). Without future adjustments, a host of characteristics of the current tax system will continue to interact with economic conditions and cause receipts, on net, to grow faster than GDP.

First, the individual income tax system is progressive, which means that households with higher incomes are taxed at higher rates. Consequently, as GDP and hence individual incomes grow, an ever-larger proportion of income will be subject to higher tax rates. That growth of income will both increase the amount of income taxed at the highest rates and decrease the amount of earned income tax credits claimed by low-income taxpayers. Because much of the tax system is indexed for inflation, that phenomenon will occur primarily as a result of real GDP growth. But because some features of the regular income tax system are not indexed, inflation will cause additional, although modest, increases in receipts relative to GDP by 2082.

Second, the individual income tax system includes the alternative minimum tax, which subjects more taxpayers and a greater fraction of income to higher tax rates as incomes grow. The AMT is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax system. Households must calculate the amount they owe under both the AMT and the regular income tax and pay the higher of the two amounts.¹ The AMT is not indexed for inflation; therefore, sustained inflation causes more taxpayers to pay the AMT (as their nominal income rises over time) and causes the AMT to claim an ever-larger share of GDP.

Third, current tax law embodies an increase in revenues in 2011. Most of the provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) are scheduled to expire after December 31, 2010. As the tax code reverts to prior law, tax rates will rise, some tax credits will fall, and thresholds for certain rates will shift. Those changes will increase the level of receipts as a share of GDP in 2011 and beyond.

Fourth, between now and about 2030, the Treasury will receive some tax revenues that have essentially been deferred. Contributions to retirement plans, such as 401(k) plans and individual retirement accounts, and contributions to employer-sponsored defined-benefit plans are tax-exempt when they are made. The income earned on assets in those accounts also is exempt from taxes, but withdrawals from those plans are taxable. Those sums will become a rising portion of taxable income as the baby boomers retire, which will tend to boost receipts relative to GDP.

At least one factor will reduce receipts over time, however. The share of employees’ compensation that is paid in the form of wages and salaries (which are subject to income and payroll taxes) will decrease over time, CBO projects, in part because of the rising costs of nontaxable fringe benefits, such as employer-paid health insurance. That declining share will reduce taxable income and therefore revenues (from both income taxes and payroll taxes) relative to GDP.

Although less important in magnitude, the design of two other tax sources contributes to changes in the share of GDP that such taxes claim over time. Most excise tax revenues stem from duties that are levied as a fixed charge per unit purchased. Under current law, the fee schedule is projected to stay the same for most excise taxes. In that way, excise taxes will not grow as fast as the economy and thus will decline relative to GDP over time. In contrast, the estate tax exemption under current law is projected to remain fixed after 2011. As a result, a greater share of wealth will be subject to that tax over time. With the tax base growing relative to GDP under current law, estate tax receipts will rise relative to GDP over the long term. That projected increase in estate tax receipts will more than offset the fall in excise tax revenues as a share of GDP.

Both corporate and payroll taxes are projected to remain relatively constant as a share of their tax bases—wages and corporate profits, respectively—over the next 75 years. Most corporate profits are taxed at the top corporate tax rate, so real bracket creep does not lead to a higher average tax rate over time. Because profits are assumed to maintain a constant share of GDP over the long term, the projected corporate tax share likewise remains constant.

Payroll taxes are levied as a fixed percentage of wages, with one portion of the tax applying only up to a specified taxable maximum amount. Because that taxable amount is indexed for wage growth, the average payroll tax rate on wages is expected to remain relatively constant over the long term. The only significant change in the ratio of payroll taxes to GDP over the next 75 years, therefore, comes from the previously mentioned impact of rising costs for health care on the wage share of GDP.

Although there is some tendency over the long term for rising health care costs to reduce receipts relative to GDP, the overwhelming effect of the tax system’s current-law features is to raise receipts relative to GDP; most of that revenue growth comes from the individual income tax. Consequently, under the extended-baseline scenario, receipts would rise from just under 19 percent of GDP in 2007 to 22 percent by 2040 and 25 percent by 2082.

Payroll taxes under this scenario would be the same as under the extended-baseline scenario. Other sources of revenue—except for the corporate income tax—are assumed to maintain their same ratio to GDP as in 2007. Corporate income taxes between 2007 and 2017 would follow the path projected in CBO’s 10-year baseline, which assumes that corporate profits vary relative to GDP. Corporate taxes would be held constant as a share of GDP after 2017, when the corporate profit share of GDP is assumed to be constant. Under the alternative fiscal scenario, revenues would reach 19 percent of GDP in 2040 and rise to just under 21 percent by 2082. (For CBO’s assumptions about particular revenue sources under the two scenarios, see Table 5-1.)

	Extended-Baseline Scenario	Alternative Fiscal Scenario
Individual Income Taxes	As scheduled under current law	2007 law with AMT parameters indexed to inflation after 2007

Corporate Income Taxes	As scheduled under current law	As scheduled under current law

Payroll Taxes	As scheduled under current law	As scheduled under current law

Excise and Estate and Gift Taxes	As scheduled under current law	Constant as a share of GDP for the entire period

Other Revenues	As scheduled under current law through 2017; constant as a share of GDP thereafter	As scheduled under current law through 2017; constant as a share of GDP thereafter

Under both the extended-baseline and alternative fiscal scenarios, the individual income tax would be responsible for the bulk of the revenue increase relative to GDP. The rise in income tax receipts relative to GDP, though, would be much larger under the extended-baseline scenario. Individual income tax revenues would rise by about 7.3 percentage points between 2007 and 2082 under that scenario and by about 3.6 percentage points under the alternative fiscal scenario. The difference of 3.6 percentage points between the two scenarios is largely attributable to the impact of two factors incorporated in the extended-baseline scenario—the mounting effects of the AMT and the expiration of EGTRRA and JGTRRA—both of which are currently the subject of considerable legislative interest. ²

Whereas most parameters of the regular individual income tax are indexed for inflation, the parameters of the AMT are not. Because a taxpayer must pay the greater of the AMT or the regular tax, the lack of indexing under the AMT is responsible for most of its growing impact over time. That impact can be measured by comparing the alternative fiscal scenario, which assumes indexing of the AMT’s parameters, with a variant of the extended-baseline scenario, which does not. Both assume that the EGTRRA and JGTRRA tax provisions continue beyond 2010 after their scheduled expiration. (In that regard, the variant differs from the extended-baseline scenario.) In 2017, individual income tax revenues are projected to be 0.6 percentage points higher under this variant of the extended-baseline scenario, and that difference grows to 2.9 percentage points by 2082 as the cumulative effect of inflation causes more taxpayers to be subject to the AMT (see Figure 5-3).³

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budet projections from 2008 to 2017 and then extending the baseline concept in its projections for the rest of the years in the 75-year projection period, to 2082. The variant of the extended-baseline scenario assumes that the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 do not expire as scheduled at the end of 2010. The alternative fiscal scenario deviates from CBO’s baseline projections even during the next 10 years, incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.

Comparing the extended-baseline scenario with the variant in which the 2001 and 2003 tax legislation does not expire highlights the impact of the assumptions regarding EGTRRA and JGTRRA. The expiration of EGTRRA and JGTRRA contributes about 1 percentage point to the higher receipts-to-GDP ratio in 2011; the effect declines to about 0.6 percentage points in 2045 and holds at roughly that level through 2082. The explanation for that ebbing impact lies in the growth of the AMT. As more individual income taxes are paid through the AMT over time, the amount of the tax change triggered by the sunset of EGTRRA and JGTRRA will decline because many of the provisions of those laws do not benefit taxpayers who are subject to the AMT.

In total, individual income tax revenues would be about 1.2 percentage points higher in 2011 under the extended-baseline scenario. That difference would rise to 3.2 percentage points by 2045 and to 3.6 percentage points by 2082.

Individual income tax revenues under the alternative fiscal scenario would continue to rise as a share of GDP, even though that scenario would remove the impact of the AMT and expiration of EGTRRA and JGTRRA. The increase in receipts as a share of GDP under that scenario is largely attributable to the progressive rate structure of the tax system. As income grows, more income is taxed at higher rates, increasing income tax revenues relative to GDP by 1.7 percentage points by 2045 and by 3.6 percentage points by 2082. Most of that increase stems from real bracket creep. But because even a low annual rate of inflation would amount to a significant increase in prices by 2082, some of the rising ratio of receipts to GDP under the alternative fiscal scenario is attributable to the interaction of income growth and the remaining unindexed provisions of the tax code. If policymakers indexed all parameters in the tax code (including the AMT) for both real and inflationary growth in income, those parameters of the tax system that tend to push up revenues relative to GDP would no longer do so.

Another factor contributing to the increase in income tax revenues as a share of GDP—through about 2030—is the retirement of the baby-boom generation. Taxable distributions from retirement plans will rise as a share of GDP as the portion of the population receiving pension benefits grows through 2030 and levels off thereafter. As a result, between 2007 and 2030, projected revenues would climb by about 0.5 percentage points of GDP under both scenarios. Beyond 2030, the net impact of contributions, earnings, and withdrawals would do little to change the revenue share of GDP.

Partially offsetting the factors that tend to cause receipts from individual income taxes to rise as a share of GDP is the projected growth in health care costs, which is expected to exceed growth in GDP (so-called excess cost growth) and thus tend to reduce the revenue share over time. For this analysis, CBO projects that private health care costs will rise from 11 percent of GDP in 2007 to 30 percent in 2082. Such growth in health care costs would reduce individual income tax revenues in two ways. First, rising health insurance premiums, which are generally tax-exempt, would reduce the portion of compensation that employees receive in taxable wages. Second, taxable income would be reduced because deductions related to medical expenses would also increase relative to income as health care costs rose. Those deductions include ones for health insurance premiums of self-employed individuals and for medical expenses.

The impact of rising health care costs on revenues can be estimated by comparing individual income tax revenues under the extended-baseline scenario with what revenues would be if health care costs grew at the same rate as GDP (see Figure 5-4). The excess cost growth would reduce projected individual income tax revenues by 1.2 percentage points of GDP by 2050 and 1.6 percentage points by 2082. The lower taxable wages that resulted from faster growth in health care costs would also affect the payroll tax base, reducing projected payroll tax revenues by 0.7 percentage points of GDP by 2082. Rising health care costs would reduce the growth in revenues under the alternative fiscal scenario as well. (By reducing taxable wages, growth in health care costs would eventually reduce Social Security benefits, offsetting some of the negative effects on the budget from reduced payroll tax revenues.)

Payroll tax revenues are projected to fall slightly under both scenarios—from about 6.0 percent of GDP in 2007 to 5.4 percent by 2082 (see Figure 5-5). Rising health care costs account for the entire expected decline in payroll taxes. Were it not for that factor, payroll taxes would be expected to remain roughly constant as a share of GDP. The important parameter for payroll taxes—the maximum earnings that are taxable for the Old-Age, Survivors, and Disability Insurance (OASDI) portion of Social Security—is effectively indexed for both real and inflationary growth (unlike the income tax) because it is tied to average wages.⁴

Revenues other than those from individual income taxes and payroll taxes follow different paths under the two scenarios. Under the extended-baseline scenario, other revenues would decline by 0.8 percentage points of GDP between 2007 and 2017 and then rise by 0.7 percentage points of GDP by 2082. The decrease during the 10-year baseline period mainly reflects the decline in corporate tax revenues as a share of GDP resulting from the expected drop in corporate profits from their historically high levels. (Once the profit share of GDP stabilizes after 2017, projected corporate tax revenues remain a constant share of GDP because virtually all corporate taxable income is effectively taxed at a flat rate, the top statutory rate.)

The rise in other revenues as a share of GDP between 2017 and 2082 is the net result of projected trends in excise taxes and estate and gift taxes (corporate and other miscellaneous revenues are assumed to be constant as a share of GDP over that period). Excise taxes as a share of GDP are expected to decline by 0.3 percentage points between 2017 and 2082 under the extended-baseline scenario because most excise taxes are specific levies and would thus diminish in importance as inflation accumulated over the period. That decline in the excise tax share would be more than offset by an expected increase of 1.0 percentage points of GDP in estate and gift tax revenues. The amount of wealth exempt from the estate tax is not indexed for inflation or real growth and therefore, over time, a greater share of wealth would be subject to the tax under the extended-baseline scenario.

Under the alternative fiscal scenario, most other revenues are assumed to be constant as a share of GDP between 2007 and 2082. An exception is the corporate income tax, because the corporate tax base is not constant as a share of GDP until after 2017. Between 2007 and 2017, corporate income taxes as a percentage of GDP would follow CBO’s 10-year baseline and reflect the expected decline in corporate profits as a share of GDP.

Inflation and income growth would interact with the tax parameters in both revenue paths to change the characteristics of the tax system over time. The tax system in 2082 under the extended-baseline scenario would have very different characteristics than the tax system of 2007. Many more taxpayers would pay the AMT in 2082; marginal and average tax rates would be higher, and the dollar value of some parameters of the tax would fall sharply in real terms and even faster relative to income. As a result of all of those changes, the share of income paid in taxes at various points in the income distribution in 2082 would differ greatly from the share in 2007. Changes to the tax system from the expiration of EGTRRA and JGTRRA after 2010 would be less significant than many of the changes that resulted from the cumulative effect of growth in price levels and incomes over many years. Under the alternative fiscal scenario, the changes in the tax system between 2007 and 2082 would also be significant, even though that scenario does not have the changes associated with the expiration of EGTRRA and JGTRRA and mitigates much of the growing impact of the AMT by indexing its parameters for inflation.

The effect of the AMT on taxpayers is especially significant under the extended-baseline scenario. By 2045, roughly 18 percent of individual income tax liability would be generated by the AMT, compared with about 7 percent today (see Figure 5-6). The AMT’s contribution to receipts, though, gives little indication of the number of people affected by the tax. Roughly 60 percent of the nation’s households would be subject to the AMT by 2045, a dramatic increase from the current 15 percent.

The share of households subject to the AMT under the extended-baseline scenario is projected to continue to increase to roughly 75 percent by 2082. The AMT’s share of total revenues would likewise continue to rise beyond 2045, reaching its peak around 2060, at which point it would begin to decline. AMT revenue growth would eventually level off as real bracket creep caused a greater share of income to be subject to the top marginal tax rate under the regular tax. Not as much bracket creep would occur under the AMT. Therefore, the amount of additional tax liability under the AMT would decline as the amount of tax calculated under the regular tax rose. The AMT would continue to apply to many taxpayers, but the additional revenue attributable to it would decline.

The indexing of the AMT’s parameters under the alternative fiscal scenario would mitigate most additional revenue growth generated by the AMT under the extended-baseline path. The share of individual income tax revenue generated by the AMT would hold steady at roughly 7 percent from 2007 through 2082. The fraction of households subject to the AMT would rise from about 15 percent to about 30 percent between 2007 and 2082 under this scenario, but many of those households would not pay much in the way of additional tax.

Marginal tax rates on income from labor and capital would increase under both revenue scenarios. The increase in the marginal tax rate on labor would reduce people’s incentive to work, and the increase in the marginal tax rate on capital would reduce their incentive to save. The future path of economic output would depend not only on the marginal tax rates under the two scenarios but also on the paths of overall spending and revenues. (For further discussion of the interaction of the two scenarios and economic output, see Chapter 1.)

CBO estimates that under the extended-baseline scenario, the marginal tax rate on labor will increase by 3.2 percentage points between 2007 and 2040 and decrease somewhat between 2040 and 2082 (see Table 5-2). Marginal tax rates on labor would rise after 2007 because of the expiration of EGTRRA and JGTRRA after 2010 and because of real bracket creep under the regular tax and the growing number of taxpayers affected by the AMT. The anticipated increase in rates from those aspects of the tax system would be offset by the decline in the share of compensation subject to both the income and payroll taxes as a result of the increasing share of compensation expected to be paid as nontaxable health insurance. Under the alternative fiscal scenario, marginal tax rates on labor would be relatively flat after 2007. Rates rise to a lesser extent than under the extended-baseline scenario because the AMT and the expiration of EGTRRA and JGTRRA do not play a significant role.

Notes: The effective federal marginal tax rate on income from labor is the share of the last dollar of earnings in the economy that is taken by federal individual income and payroll taxes. The effective federal marginal tax rate on income from capital is the share of the last dollar of such income that is taken by federal individual income and corporate income taxes.

The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budet projections from 2008 to 2017 and then extending the baseline concept in its projections for the rest of the years in the 75-year projection period, to 2082. The alternative fiscal scenario deviates from CBO’s baseline projections even during the next 10 years, incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.

Marginal tax rates on capital under the extended-baseline scenario would increase by 2.0 percentage points between 2007 and 2040 and by an additional 2.9 percentage points between 2040 and 2082. As with the marginal tax rates on labor, the marginal tax rates on capital would be lower under the alternative fiscal scenario. Under that scenario, rates would be 2.5 and 3.1 percentage points lower in 2040 and 2070, respectively, than those in the extended-baseline scenario.

Between 2007 and 2082, the cumulative effect of rising prices sharply reduces the value of some parameters of the tax system that are not indexed for inflation. For example, under the alternative fiscal scenario, the $1,000 child tax credit is reduced to less than $200 by 2082 (when measured in 2007 dollars). Under the extended-baseline scenario, the exemption of the first $1 million of wealth from the estate tax in 2017 is reduced to less than $200,000 by 2082 (again, in 2007 dollars). The amount of mortgage debt that is eligible for the mortgage interest deduction is also reduced from $1 million to $200,000 under both scenarios (in 2007 dollars). The portion of Social Security benefits subject to taxation increases under both scenarios, climbing from 26 percent in 2007 to 57 percent by 2082 (because the thresholds for taxing benefits are fixed).

Even parameters that are indexed for inflation would lose value relative to income over the 75-year period. The $3,400 personal exemption in 2007 would quintuple between 2007 and 2082 because it is indexed for inflation, but per capita income would rise by 11 times during that period, so the value of the exemption relative to income would decline by 55 percent. The proportion of taxpayers claiming the earned income tax credit (EITC) would decline from 15 percent in 2007 to less than 5 percent in 2082 under both scenarios as growth in real incomes moved most taxpayers out of the income range for EITC eligibility. As more taxpayers and a greater proportion of income are taxed in higher tax brackets over time, the share of income in the top bracket under the regular tax system is projected to grow from 8 percent in 2007 to 14 percent by 2082.

The lack of any indexing for some parameters and indexing only to inflation for others has significant implications beyond the usual tax policy horizon. Locking the current rules in place for 75 years would cause individual income taxes to change differentially for taxpayers at different points in the income distribution. For example, a married couple with two children earning the median income in 2007 pays about 4 percent of their income in individual income taxes (see Table 5-3).⁵ By 2082, under the extended-baseline scenario, a couple at that point in the distribution would pay 17 percent of their income in individual income taxes, an increase of 13 percentage points. In contrast, a couple with income four times the median would see their share of income paid in income taxes rise from 21 percent in 2007 to 26 percent by 2082 under the extended-baseline scenario, an increase of only 5 percentage points. Income taxes as a share of income would be rising at both points in the income distribution but by a greater proportion for the couple earning the median income.

			Taxes as a Share of Income (Percent)
			Extended-Baseline Scenario		Alternative Fiscal Scenario
		Income	Income	Income and	Income	Income and
		(2007 dollars)	Taxes	Payroll Taxes	Taxes	Payroll Taxes


	Single Taxpayer
Half Median Income	2007	18,766	2	12	2	12
	2050	35,176	4	11	3	10
	2082	53,147	7	15	4	11

Median Income	2007	37,534	7	19	7	19
	2050	70,351	11	22	8	19
	2082	106,293	16	27	10	20

Twice Median Income	2007	75,067	11	24	11	24
	2050	140,703	19	31	13	26
	2082	212,587	19	32	15	28

Four Times Median Income	2007	150,135	15	26	15	26
	2050	281,406	21	31	20	30
	2082	425,173	22	32	21	31

	Married Couple with Two Children^a
Half Median Income	2007	44,803	-8	3	-8	3
	2050	83,733	6	14	2	10
	2082	126,809	11	19	4	11

Median Income	2007	89,606	4	16	4	16
	2050	167,465	16	27	9	20
	2082	253,617	17	28	12	23

Twice Median Income	2007	179,211	13	23	13	23
	2050	334,930	20	29	18	26
	2082	507,234	20	29	20	28

Four Times Median Income	2007	358,423	21	27	21	27
	2050	669,860	24	30	22	27
	2082	1,014,469	26	32	23	28

Notes: Median income amounts are derived from the March 2006 Current Population Survey and are measured in 2007 dollars. All income is assumed to be from compensation. (Compensation includes employer-provided health insurance and the employer's share of the payroll tax.)

Taxpayers are assumed to itemize if implied itemized deductions are greater than the standard deduction.

State and local taxes are assumed to be 8 percent of wages; other deductions are assumed to be 14 percent of wages.

Even though average income tax rates would be rising in both cases, taxpayers at the same point in the income distribution would be better off in 2082 because incomes would have risen significantly. In the above example, average pretax income would be up by 280 percent, and after-tax income would be up by 260 percent (

		2007	2040	2082


Marginal Tax Rate on Labor Income
	Extended-baseline scenario	27.9	31.1	29.9
	Alternative fiscal scenario	27.9	27.9	28.6

Marginal Tax Rate on Capital Income
	Extended-baseline scenario	14.3	16.3	19.2
	Alternative fiscal scenario	14.3	13.8	16.1