CBO released a paper today on trends in individual income tax revenue. Such revenue has fluctuated significantly since the early 1990s, increasing by 85 percent between fiscal years 1994 and 2000, then declining by 21 percent between 2000 and 2003, and then increasing by 47 percent between 2003 and 2007.
Income tax revenues generally rise and fall with the economy, but even as a share of gross domestic product (GDP), the recent changes in individual income tax revenue have been dramatic. Between 1994 and 2000, for example, the ratio of income taxes to GDP rose by 2.5 percentage pointsfrom 7.8 percent to just over 10.3 percent, a historic high. In the following four years, that trend reversed, and individual income taxes dropped precipitously, falling to 7.0 percent of GDP by 2004, the lowest level in more than 50 years. Revenues rebounded in the next three years, rising to 8.5 percent of GDP by 2007. The paper explores the causes of these changes in individual income tax revenues relative to the economy. The key factors include: