Beware of Revenue Estimates Stated with Such Certainty

December 04, 2012

There is a very bad tendency in Washington to wield tax revenue estimates with certainty, as though the figures were money in the bank. Throughout the negotiations over the Fiscal Cliff, reporters have repeatedly cited revenue estimates conducted by the Treasury or the Joint Committee on Taxation without any caution to the reader that they are, well, just estimates.

In reality, we should view these revenue figures with a huge lump of salt – especially when it comes to taxing high-income taxpayers.

For example, let’s consider the Treasury’s estimate for reinstating the 36 percent and 39.6 percent tax rates for upper-income taxpayers. This is a key component of President Obama’s FY 2013 budget and his opening bid to raise $1.6 trillion in new revenues over ten years.  

According to Treasury’s number crunchers, lifting the top rates will raise $441.5 billion over the next ten years. Yet, if we look at their year-by-year estimates shown below, we have to wonder what assumptions are behind that estimate. After an initial jump in 2014 (accounting for the shift in tax years to fiscal years), revenues from these high-income taxpayers are expected to grow by an average of 8 percent per year for the next decade.

Reinstate the 36-percent and 39.6-percent tax rates for upper-income taxpayers

 

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Treasury Estimate

$23,101

$32,492

$35,507

$39,133

$42,744

$46,268

$49,839

$53,509

$57,394

$61,567

Percentage Increase

 

41%

9%

10%

9%

8%

8%

7%

7%

7%

Looking at the past decade, however, this would appear to be a very unrealistic assumption. If we isolate just the “millionaire” taxpayers we find a significant fluctuation in both the number of millionaires and the amount of tax revenues they pay.  

As we can see in the first chart, the number of millionaire tax returns more than doubled from 2001 to 2007, although the path was anything but a straight line. Revenues from these taxpayers actually declined between 2001 and 2003, before doubling by 2007.

After the 2007 peak, both the number of millionaire returns and the amount of income taxes they paid collapsed dramatically during the recession. Between 2007 and 2009, the number of millionaire returns fell by about 40 percent while their tax payments fell by roughly 45 percent. While the number of millionaire returns and their tax payments increased slightly in 2010, why would anyone assume that these trends would continue at an 8 percent annual pace for the next decade?

What should also trouble us about these revenue estimates is that while scorekeepers purportedly take into account any behavioral effects from changes in tax rates, they do not adjust for any economic effects. It is hard to believe that the economy would grow at such a pace to increase the incomes of wealthy taxpayers by 8 percent per year following a major increase in tax rates. Perhaps there is economic theory to support such an assumption, I just don’t know what it is.  

 

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