Recent Changes in CBO’s Projections of Corporate Income Tax Revenues

Posted by
Phill Swagel
February 7, 2020

Last week, the Congressional Budget Office published The Budget and Economic Outlook: 2020 to 2030, which described our baseline projections of corporate income taxes, among other things. Since then, we have received questions about differences between those projections and the previous ones, which we published in August 2019. All told, we reduced our projections of corporate income tax receipts during the 2020–2029 period by $127 billion (or about 4 percent) for a variety of reasons, which are discussed in Appendix A of the report. Specifically, we have been asked about the reduction of roughly $110 billion in our projections of corporate income tax receipts related to certain provisions of Public Law 115-97, referred to here as the 2017 tax act. We revised those projections to reflect new information about the implementation of some provisions of the act, as well as new information about how taxpayers are responding.

Most significantly, we reduced our projection of the amount of income that will be taxed as a result of certain provisions of the act related to international business activities. The projected effect of those international provisions on receipts was subject to considerable uncertainty when we first analyzed the new law in April 2018, and the projection continues to be uncertain. CBO tries to produce estimates that lie in the middle of the distribution of possible outcomes. In light of recent information, we have revised downward the distribution of possible outcomes for the international provisions’ effects on receipts, as well as our central estimate of those effects. Those revisions reflect a number of factors. In particular, more than two years following enactment, taxpayers have had time to better understand how the new tax rules interact and have more information about the implementation of the law, including regulations announced by the Internal Revenue Service over the past year. Information about taxpayers’ behavior and recent regulations are just some of the factors that CBO incorporated into its most recent revisions; another is changes in recent tax payments. Overall, the downward revision to our projections of corporate income tax revenues owing to the international provisions reflects an improved understanding of taxpayers’ behavior that has been gained this year.

We also revised our projection of corporate income taxes to reflect new data about payments of a onetime tax that the 2017 tax act imposed on the existing foreign earnings of U.S. corporations. Our analysis of preliminary data suggests that total payments of that tax will be slightly smaller than we had projected and also that more of the payments than we had anticipated occurred in 2018 and 2019. Since taxpayers have already paid a larger portion of the tax, there remains less to be paid during the 2020–2026 period.

The revisions that we made to projected corporate income tax revenues also include modeling adjustments made to better reflect our updated economic projections. For example, to better align our revenue projections with expectations for future business investment, we improved our modeling related to the rule in the 2017 tax act requiring that research and experimentation expenditures be capitalized and amortized over five years; that change in our model raised corporate receipts in CBO’s projections beginning in 2022.

More broadly, the effects of the tax act generally appear to have been what we expected. Notwithstanding our revisions to the effect on corporate income tax revenues, the effects on the budget have seemed generally consistent with our expectations. The act’s observed effects on the economy too have appeared consistent with our initial assessment. In particular, consumer spending and investment appear to have been affected roughly as we anticipated, although unrelated economic developments and changes in federal policies have complicated that judgment. Tariffs put in place starting in 2018, for example, have probably dampened business investment, making it difficult to distinguish their impact from the impact of the tax act.  

Our current baseline projections of federal revenues reflect our best understanding of current data and taxpayers’ behavior. Corporate income tax receipts over the past several years have been roughly what we would have expected if we had known previously what we know now about corporate profits. Specifically, the Bureau of Economic Analysis recently revised downward its measure of corporate profits during the 2016–2018 period, a change that helped resolve previously unexplained weaknesses in corporate receipts. In addition, those receipts began to strengthen in June 2019. To reflect both of those developments, we reduced our projections of domestic corporate profits but increased our estimates of the average tax rates on those profits in future years—changes that had little net effect on projected receipts over the next decade.  

We will continue to track what is happening and incorporate new data into our analysis. For instance, detailed information from the tax returns for income earned in 2018—the first returns that reflect most of the changes made by the 2017 tax act—will be available later this year. If new data or information about taxpayers’ responses differs from our current expectations, we will incorporate those developments into our revenue projections when we next update them.

Phillip L. Swagel is CBO’s Director.