Over the past 40 years, total federal revenues have averaged 17.4 percent of GDP—ranging from a high of 19.9 percent of GDP in 2000 to a low of 14.6 percent in 2009 and 2010 (see Figure 4-1). The variation over time in total revenues as a percentage of GDP is primarily the result of fluctuations in receipts of individual income tax payments and, to a lesser extent, of fluctuations in collections of corporate income taxes. Revenues from individual income taxes have ranged from slightly more than 6 percent of GDP (in 2010) to slightly less than 10 percent of GDP (in 2000). Since the 1970s, corporate income taxes have ranged from about 1 percent to about 3 percent of GDP.
The variation in revenues generated by individual and corporate income taxes has stemmed in part from changes in economic conditions and from the way those changes interact with the tax code. For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP because of a phenomenon known as real bracket creep—rising real (inflation-adjusted) income tends to push more and more income into higher tax brackets. In addition, because some parameters of the tax system are not indexed for inflation, rising prices also push a greater share of income into higher tax brackets. During economic downturns, corporate profits generally fall as a share of GDP, causing corporate tax revenues to shrink, and losses in households’ income tend to push a greater share of total income into lower tax brackets, resulting in lower revenues from individual income taxes. Thus, total tax revenues automatically rise relative to GDP when the economy is strong and decline relative to GDP when the economy is weak.
Social insurance taxes, by contrast, have been a stable source of federal revenues. Receipts from those taxes increased as a percentage of GDP during the 1970s and 1980s because of rising tax rates, increases in the number of people paying those taxes, and growth in the share of wages subject to the taxes. For most of the past two decades, legislation has not had a substantial effect on social insurance taxes, and the primary base for those taxes—wages and salaries—has varied less as a share of GDP than have other sources of income. In 2011 and 2012, however, the temporary reduction in the Social Security tax rate caused receipts from social insurance taxes to drop; with the expiration of that provision at the end of 2012, social insurance receipts as a share of GDP are expected to approach their historical level—close to 6 percent of GDP.
Revenues from other taxes and fees declined relative to the size of the economy over the period from 1971 to 2013 mainly because receipts from excise taxes—which are levied on such goods and services as gasoline, alcohol, tobacco, and air travel—have steadily dwindled as a share of GDP over time. That decline is chiefly because those taxes are usually levied on the quantity of goods sold rather than on their cost, and the rates have generally not kept up with inflation.
Under current law, revenues are projected to increase further, to 17.7 percent of GDP in 2014 and 18.6 percent in 2015, and then to remain above 18 percent of GDP from 2016 through 2023. About half of the expected increase in the next two years would stem from changes in tax rules, such as the scheduled expiration at the end of December 2013 of enhanced depreciation deductions allowed for certain business investments. Accounting for the other half are factors related mainly to the strengthening economy, including increases relative to GDP in some components of taxable income (such as wages and salaries, capital gains realizations, proprietors’ income, and domestic economic profits) and the continued rise to more normal levels in the average tax rate on domestic economic profits. CBO projects that revenues will grow at close to the same rate as GDP over the 2015–2023 period. Individual income tax receipts are projected to rise relative to GDP as increases in taxpayers’ real income push more income into higher tax brackets; in contrast, corporate income tax receipts and remittances to the U.S. Treasury from the Federal Reserve are projected to fall relative to GDP.