One of the Congressional Budget Office’s statutory requirements is to produce an annual report, The Budget and Economic Outlook, that provides the agency’s projections of what the federal budget and the economy would look like in the current fiscal year and over the next 10 years if current laws governing taxes and spending generally remained unchanged. The agency uses its economic forecast—which includes projections of income, interest rates, and other variables—as a basis for projecting revenues from each major revenue source, spending for every federal budget account, the resulting deficits or surpluses, and federal debt. Those budget projections—often referred to as CBO’s budget baseline—provide a benchmark that is used to evaluate the anticipated effects of proposed legislation and to determine whether the legislation is subject to various budget enforcement procedures.
At the end of 2025, many of the provisions of the 2017 tax act (Public Law 115-97) that changed the individual income tax system are scheduled to expire. Certain other provisions of that law—including bonus depreciation, a policy that allows businesses to immediately deduct a portion of the cost of certain investments—are set to expire or phase out over time. As a result, the effects that the tax system has on people’s incentives to work, save, and invest vary over the next several years in CBO’s economic forecast and baseline budget projections.
Today, CBO published two slide decks that explain how the agency models the economic effects of the changes in incentives stemming from the expiration of tax provisions. This blog post summarizes those slides and reviews some other information that has become available since CBO first estimated the effects of the 2017 tax act in April 2018.
Individual Income Tax Provisions
The first slide deck focuses on how the expiring provisions of the 2017 tax act that altered the individual income tax system affect CBO’s economic projections. Expiration of those provisions increases CBO’s projections of annual revenues as a percentage of gross domestic product (GDP) by about 1 percentage point. In the agency’s projections, the provisions’ expiration reduces the supply of labor as people respond to higher marginal tax rates. However, because higher taxes increase revenues, the federal government borrows less, making more funds available for private investment. Those two effects roughly offset each other. As a result, the expiration of the individual income tax provisions of the 2017 tax act does not significantly affect CBO’s projections of real GDP (that is, GDP adjusted to remove the effects of inflation).
Deductions for Investments
CBO’s forecast of investment, which reflects current law, incorporates the effects of scheduled changes to bonus depreciation. In the second of today’s slide decks, CBO describes how it uses its capital tax model, called CapTax, to estimate the effects that such changes in deductions to recover the cost of capital have on investment. CBO has published a working paper that describes the agency’s CapTax model, and code for the model is available on GitHub. The agency uses estimates from CapTax as an input into its forecast of investment; it has released supplemental tables containing certain CapTax estimates along with every volume of The Budget and Economic Outlook that it has published in recent years.
Observations Since the Enactment of the 2017 Tax Act
CBO regularly assesses the methods that it uses to model the effects on the economy of changes in tax policy. For example, CBO examined recent work (Chodorow-Reich, Smith, Zidar, and Zwick 2024; Kennedy, Dobridge, Landefeld, and Mortenson 2024) that used tax data to analyze the effects of permanent changes to the corporate income tax rate and the international tax system that were included in the 2017 tax act. The agency has found that its projections and its models for estimating how federal taxes affect investment incentives are broadly consistent with that recent research.
The effects of the 2017 tax act were first reflected in the projections that CBO published in April 2018 in The Budget and Economic Outlook: 2018 to 2028. Nominal receipts from fiscal years 2018 to 2024 were $1.5 trillion (or 5.6 percent) greater than the total of $27.0 trillion that CBO projected for that period in April 2018. Separating the tax-induced effects from the effects of unanticipated events—most notably, the coronavirus pandemic—is challenging.
CBO currently estimates that the primary reason for the higher revenues is the burst of high inflation that began in March 2021. That inflation contributed roughly $900 billion to the $1.5 trillion difference. An increase in real economic activity, especially in the later years of the period, also contributed to the higher revenues, adding roughly $700 billion to the difference. Customs duties from new tariffs contributed an additional $250 billion. Other factors, including subsequent legislation, partially offset those first three factors. As more data and research become available, CBO will use them to update its projections of the economy and revenues and its estimates of how changes to the tax system affect them.
Phillip L. Swagel is CBO’s Director.