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Taxes

Over the past 40 years, federal revenues have ranged from nearly 21 percent of GDP, in fiscal year 2000, to less than 16 percent, in fiscal years 2009 through 2012; they have averaged about 18 percent of GDP over the four decades. In addition to projecting the future course of federal revenues, CBO analyzes the budgetary and economic effects of various features of the federal tax system and the effects of potential changes to current tax rules.

Sub-Topics:

  • Analysis of the President's Budget
  • Budget and Economic Outlook
  • Distribution of Federal Taxes
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S. 1944, Middle Class Tax Cut Act of 2011

cost estimate

December 6, 2011

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  • Report on the Troubled Asset Relief Program—December 2011

    December 16, 2011
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Troubled Asset Relief Program: Infographic

graphic

December 16, 2011

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Discretionary Spending

report

October 26, 2011

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Highlights

Discretionary outlays—the part of federal spending that lawmakers generally control through annual appropriation acts—totaled about $1.35 trillion in 2011, or close to 40 percent of federal outlays. Slightly more than half of that spending was for defense. The remainder went for a wide variety of government programs and activities, with the largest amounts spent for education, training, employment, and social services; transportation; income security (mostly housing and nutrition assistance); veterans' benefits (primarily for health care); health-related research and public health; international affairs; and the administration of justice.



Discretionary outlays declined from about 10 percent of gross domestic product (GDP) during much of the 1970s and 1980s to 6.2 percent in 1999, mostly because defense spending, as a share of GDP, declined over that period. Since then, discretionary outlays have risen relative to the size of the economy, totaling about 9 percent of GDP in 2010 and 2011, in part because of military operations in Afghanistan and Iraq and in part because of the discretionary funding provided by the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5). The 2010 and 2011 figures were the highest in about 20 years.

However, lawmakers have already taken significant steps to constrain discretionary spending. Budget authority—the authority to incur financial obligations—provided for defense activities in 2011 was $3 billion (or less than 1 percent) below the amount provided the year before; budget authority for discretionary nondefense programs (plus the obligation limitations that govern spending for certain discretionary transportation programs whose budget authority is not classified as discretionary) was $39 billion (or 7 percent) below the amount provided in 2010. As a result, total discretionary funding (that is, budget authority plus obligation limitations) in 2011 was the lowest, as a share of GDP, since 2002. Nevertheless, discretionary outlays in 2011 were close to the amounts spent in 2010, the Congressional Budget Office (CBO) estimates, because of spending from funds appropriated in previous years.

In addition, the Budget Control Act of 2011 (P.L. 112-25) instituted statutory caps on discretionary appropriations for each of the fiscal years 2012 through 2021. (By contrast, in most recent years the total amount of annual appropriations—except for those designated as emergency requirements—was governed by annual funding allocations agreed to by the House of Representatives and the Senate but not enacted into law.) The new caps do not constrain spending for the war in Afghanistan or similar activities or for designated emergencies; however, if implemented as written in the act, the caps would keep other appropriations for 2012 and 2013 below the amounts provided for 2011 and would limit the growth of those appropriations to about 2 percent a year from 2014 to 2021. Compared with allowing nonwar discretionary appropriations to grow at the rate of inflation, the capped amount of discretionary budget authority would be about 4 percent lower in 2012 and 9 percent lower in 2021; as a result, budget deficits would be reduced by $778 billion between 2012 and 2021, CBO estimates (not counting the savings in interest payments resulting from lower outlays).

The future path of discretionary spending may be affected by the actions of the Joint Select Committee on Deficit Reduction. Under provisions of the Budget Control Act, legislation originating from this Committee could directly alter the path of such spending, for example, by changing the caps. Alternatively, if legislation originating from this Committee and estimated to produce at least $1.2 trillion in deficit reduction (including an allowance for interest savings) is not enacted by January 15, 2012, automatic procedures to cut spending will take effect in January 2013. CBO expects that 71 percent of the net savings from the automatic procedures would come from reductions in discretionary appropriations. If those procedures were triggered, appropriations for defense, excluding funding for overseas contingency operations (war-related funding), would be $110 billion—or 16 percent—lower by 2021 than they would be if they kept up with inflation; funding for nondefense activities would be $99 billion—or 15 percent—lower.

Moreover, for some programs, a comparison with inflation-adjusted funding understates the magnitude of reductions relative to the cost of maintaining current policies or plans. For example, implementing the Administration's multiyear defense plans would require nonwar defense spending to grow faster than the rate of inflation, and the demands for veterans' health care and Pell grants for higher education have also been growing more quickly than inflation. In contrast, the funding required for war-related activities—in Afghanistan and other countries—will be smaller than the amounts provided in recent years if the number of deployed troops is smaller and the pace of operations is diminished.

Regardless of the constraints placed on discretionary spending through the Budget Control Act or other actions taken by this Congress, subsequent Congresses will make the final decisions about future discretionary appropriations. Those decisions might or might not satisfy the constraints put in place by this Congress. Nevertheless, CBO assumes in its baseline projections that discretionary funding subject to the caps in the coming years will be equal to the amounts currently specified in law for those caps. As a result, legislation that reduced the funds available for a particular discretionary activity or achieved savings in undertaking a particular activity would only reduce projected total appropriations if the legislation also lowered the caps; without a reduction in the caps, funding for other discretionary activities would probably fill the gap created by the specific reduction or savings.



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  • Trends in the Distribution of Household Income, 1979-2007

    May 17, 2012
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Trends in the Distribution of Household Income Between 1979 and 2007

report

October 25, 2011

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Highlights

After-Tax Income Grew More for Highest-Income Households

After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers—which are payments to people through such programs as Social Security and Unemployment Insurance—have been added.)

CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent, and
  • 18 percent for the bottom 20 percent.

Shares of Income After Transfers and Federal Taxes, 1979 and 2007

The share of income going to higher-income households rose, while the share going to lower-income households fell.

  • The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
  • Most of that growth went to the top 1 percent of the population.
  • All other groups saw their shares decline by 2 to 3 percentage points.

Market Income Shifted Toward Higher-Income Households

Shifts in the distribution of market income underlie most of the changes in the distribution of after-tax income. (Market income—or income before taxes and transfers—includes labor income, business income, capital income, capital gains, and income from other sources such as pensions.)

  • Each source of market income was less evenly distributed in 2007 than in 1979.
  • More concentrated sources of income (such as business income and capital gains) grew faster than less concentrated sources (such as labor income).

Government Transfers and Federal Taxes Became Less Redistributive

Government transfers and federal taxes both help to even out the income distribution. Transfers boost income the most for lower-income households, while taxes claim a larger share of income as people's income rises.

In 2007, federal taxes and transfers reduced the dispersion of income by 20 percent, but that equalizing effect was larger in 1979.

  • The share of transfer payments to the lowest-income households declined.
  • The overall average federal tax rate fell.


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Options for Changing the Tax Treatment of Charitable Giving

report

October 18, 2011

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Highlights

Under current law, taxpayers who itemize deductions may deduct the amount they donate to charities from their adjusted gross income (AGI) when determining how much they owe in federal income taxes. That deduction gives people who itemize an incentive to contribute to charities. Like other forms of preferential tax treatment, the deduction also costs the federal government revenues that it might otherwise collect. At current levels of charitable giving, the cost of that deduction—measured as the additional revenues that could be collected if the deduction was eliminated—will total about $230 billion between 2010 and 2014, according to the Joint Committee on Taxation (JCT).

Numerous proposals have been made in recent years to alter the income tax treatment of charitable giving by individual donors. Some proposals aim to reduce the cost to the government by imposing a floor (or minimum level) that a person's charitable giving would have to exceed to qualify for preferential tax treatment. Other proposals would extend the current charitable deduction to taxpayers who do not itemize deductions or would replace the current deduction with a nonrefundable tax credit available to all taxpayers who make charitable contributions.

For this analysis, the Congressional Budget Office (CBO) examined how much taxpayers in various income groups donate to charities and what types of organizations receive those donations. CBO also investigated how changing the structure of tax incentives for giving would affect the tax subsidy (the cost in forgone revenues to the federal government), the overall level of charitable giving, and the extent to which different income groups benefit from the tax preference. Specifically, CBO looked at 11 options for altering the current income tax treatment of charitable giving, which can be grouped into 4 categories:

  • Retaining the current deduction for itemizers but adding a floor.
  • Allowing all taxpayers to claim the deduction, with or without a floor.
  • Replacing the deduction with a nonrefundable credit for all taxpayers, equal to 25 percent of a taxpayer's charitable donations, with or without a floor.
  • Replacing the deduction with a nonrefundable credit for all taxpayers, equal to 15 percent of a mail.

For each of the four categories, CBO analyzed two potential floors: a fixed dollar amount ($500 for single taxpayers and $1,000 for couples filing a joint return) and a percentage of income (2 percent of AGI). Only contributions in excess of the floor would be deductible or eligible for a credit. The analysis uses data for 2006, the most recent year for which the Internal Revenue Service's public-use sample of individual income tax returns is available. The tax treatment of charitable contributions is generally the same today as it was in 2006; however, because of rising incomes and contribution amounts, the options that include a fixed dollar floor would have a somewhat different impact today than presented here.

Effects of Policy Options on Tax Subsidies and Charitable Donations

According to CBO's modeling, adding a contribution floor to any of the approaches listed above would reduce both the total federal tax subsidy and the total amount donated to charity, relative to the same option without a floor. In each case that CBO examined, the reduction in the subsidy (and thus the increase in revenues) would exceed the reduction in charitable contributions, whether measured in dollars or as a percentage change. The reason is that introducing a floor would continue to provide a tax incentive for additional giving above the level of the floor and at the same time reduce the tax subsidy for donations that people might have made even without a tax incentive.

Allowing all taxpayers to claim a deduction for charitable giving would have increased donations in 2006 by an estimated $2.0 billion (or 1 percent) and increased the total tax subsidy by $5.2 billion (or 13 percent) from the 2006 amounts. Combining a deduction for all taxpayers with a floor, however, could both increase donations and decrease the tax subsidy. For example, such a deduction combined with a fixed dollar floor of $500/$1,000 would have increased donations by $800 million in 2006 and decreased the tax subsidy by $2.5 billion.

Replacing the current deduction with a 25 percent tax credit would increase donations and also increase the government's forgone revenues. Combining such a credit with certain contribution floors, however, could boost donations while reducing the tax subsidy or could decrease donations by a small percentage while reducing the tax subsidy by a large percentage. Setting the credit at 15 percent would reduce donations but would reduce the tax subsidy by a larger amount (both in dollars and as a percentage change).

Effects of Policy Options on Various Income Groups

Changing the tax treatment of charitable contributions would have differing effects on taxpayers at different points on the income scale. Adding a contribution floor to the current deduction for itemizers would reduce tax subsidies for all income groups, but for high-income taxpayers, the size of the reduction would vary significantly depending on the type of floor used. For instance, augmenting the deduction with a fixed dollar floor of $500/$1,000 in 2006 would have lowered the tax subsidy for people with AGI over $100,000 by 0.08 percent of their AGI, whereas adding a floor equal to 2 percent of AGI would have lowered the tax subsidy for that income group by 0.30 percent of their AGI.

Making the deduction for charitable contributions available to nonitemizers would benefit lower- and middle-income taxpayers, who tend not to itemize deductions because their deductible expenses (such as mortgage interest and state and local taxes, as well as charitable donations) are not large enough to exceed the standard deduction. Those groups would benefit even more if the current deduction—which tends to help higher-income taxpayers more because they face higher tax rates—was replaced with a nonrefundable credit that gave all income groups the same tax incentives for giving. For example, replacing the deduction with a 25 percent credit in 2006 would have increased the tax subsidy for taxpayers with AGI below $100,000 by 0.27 percent of their AGI, but it would have decreased the tax subsidy for people above that income level by 0.09 percent of AGI. Tax subsidies would be lower for all income groups with a 15 percent credit than with a 25 percent credit.

Caveats About This Analysis

The results of CBO's policy simulations are meant to highlight the general effects of the various approaches. The exact size of those effects, however, would depend on the specific parameters of a policy—such as the level of the floor or the amount of the credit—as well as on the extent to which taxpayers would change the amount of their charitable giving in response to a change in the tax subsidy. In addition, this analysis does not reflect many of the other ways in which taxpayers might respond to a change in their tax subsidy, such as shifting donations between years. (In the appendix of its May 2011 study Options for Changing the Tax Treatment of Charitable Giving, CBO examines how sensitive these results are to several different assumptions, including variations in taxpayers' responsiveness to changes in their tax subsidy and the possibility of shifts in the timing of donations.)



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Use of Tax Incentives for Retirement Saving in 2006

report

October 14, 2011

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Abstract

This CBO publication examines participation rates in and contributions to various tax-favored retirement plans in 2006, with some earlier data presented for comparison. Two features of the Economic Growth and Tax Relief Reconciliation Act of 2001 also are analyzed: increases in contribution limits and an additional incentive, known as the “saver’s credit,” that was created to encourage lower-income taxpayers to save for retirement.


Highlights

In 2006, just over half (52 percent) of all workers who filed tax returns participated in some form of tax-favored retirement plan. Overall, participation was nearly the same in 1997, 2000, 2003, and 2006—ranging from 50 percent to 52 percent.

Use of Tax Incentives for Retirement Saving in 2006
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Participation in 2006 was concentrated in employment-based plans, with 48 percent of all workers either contributing to or being covered by such a plan (47 percent as wage earners and 1 percent as self-employed people). Twenty-nine percent of workers who filed tax returns were wage earners who contributed to 401(k)-type plans. Participants in 401(k)-type plans contributed an average of $4,350 in 2006.

Only 7 percent of workers contributed to IRAs in 2006. Slightly fewer workers contributed to traditional IRAs (3 percent) than to Roth IRAs (4 percent). Contributions to traditional IRAs were larger ($2,840), on average, than contributions to Roth IRAs ($2,590).

Five percent of participants in 401(k)-type plans in 2006 contributed up to the limits established by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Twelve percent contributed amounts equal to or greater than the pre-EGTRRA limits and presumably would have made the maximum allowable contributions in the absence of EGTRRA. For traditional IRAs, EGTRRA reduced the proportion of participants constrained by the contribution limits in 2006 from 73 percent to 52 percent; for Roth IRAs, the corresponding proportions were 62 percent and 39 percent.

The saver’s credit was introduced by EGTRRA to encourage retirement saving by providing tax credits to qualifying taxpayers whose adjusted gross income falls below particular thresholds. In 2006, 25 percent of all workers who filed tax returns were eligible to take the saver’s credit based on their income and tax liability. Only 20 percent of those eligible actually contributed to a retirement account, and 65 percent of those who contributed claimed the credit. The average amount of the credit was $156.



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Trends in the Distribution of Income

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October 25, 2011


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Patterns of Charitable Giving

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October 18, 2011


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How Do People Save for Retirement?

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October 14, 2011


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Estimated Budgetary Impact of Two Versions of the American Jobs Act

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October 7, 2011


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