Individual income tax revenue

May 2, 2008

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:

  • A rising and falling income tax base, resulting from growth in wages and capital gains realizations that first exceeded and then lagged behind overall economic growth;
  • A rising and falling effective tax rate on adjusted gross income, caused by changes in real (inflation-adjusted) bracket creep (that is, increases in real incomes that shift more taxable income into higher marginal tax brackets) and THE the concentration of income in higher tax brackets
  • Tax legislation, which was a major factor in the decline in income taxes relative to GDP from 2000 to 2004, but had little to do with the increase from 1994 to 2000.