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3 Takeaways from the New Congressional Budget Office Outlook

5 min readBy: Erica York, Garrett Watson

Last week, the Congressional Budget Office (CBO) released its long overdue report on the nation’s budget and economic outlook for the years 2022 through 2032. Normally published at the beginning of the year, the delayed report reflects higher-than-anticipated inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenues, deficits, and debt since the previous update CBO published nearly a year ago in July 2021.

The CBO projections show policymakers’ top priority over the next five years will need to be cleaning up our country’s fiscal situation while maintaining a pro-growth and competitive tax code. We highlight three takeaways from the report here.

1. Corporate and individual tax revenue are expected to remain elevated over the next 10 years

In 2021, the federal government collected about $4 trillion in revenue, totaling about 18.1 percent of GDP. In 2022, CBO projects revenue will rise to about $4.8 trillion, or 19.6 percent of GDP—the largest annual revenue has been as a share of the economy since 2000.

Over the past 50 years, federal revenue has averaged about 17.3 percent of GDP. Revenue is expected to remain above its long-term average through the next 10 years, averaging about 18.1 percent of GDP from 2022 through 2032 (see table). In particular, individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. receipts are expected to increase from 9.1 percent of GDP in 2021 to 10.6 percent in 2022, averaging 9.6 percent over the next 10 years. Corporate tax revenue will remain within its historical average, averaging about 1.5 percent from 2023 to 2032 after a record year of nominal revenue in 2021.

While revenue will remain above-average over the next 10 years, some trends may push in the other direction. For example, the CBO expects capital gains realizations may decline from 5.8 percent of GDP in 2021 to 5.1 percent of GDP over the next 10 years because realizations have been well-above the historical average over the past two years.

CBO Report Shows Total Federal Revenues Will Remain Above Average Over Next Decade
50-year Average and Range 2022 2022 through 2032
Total Revenue 17.3%; 14.5% to 20.0% 19.6% 18.1%
Corporate Income Tax Revenue 1.8%; 1.0% to 2.7% 1.6% 1.5%
Individual Income Tax Revenue 8.0%; 6.0% to 9.9% 10.6% 9.6%

Source: Congressional Budget Office, “The Budget and Economic Outlook: 2022 to 2032.”

It is worth noting, however, that revenue has been unusually strong even after accounting for the economic recovery, inflation, and pandemic relief. The CBO finds “receipts from individual income taxes in the past few years have been larger than expected given currently available data on economic activity and the past relationship between tax revenues and the state of the economy.”

And likewise for corporate receipts, the CBO finds “corporate tax collections were larger in 2021 and early 2022 than can be fully explained by currently available data on business activity for those years.” The CBO assumes the unusual strength in revenue will diminish moving forward, but it is worth watching to see if revenue remains above expectations.

The factors driving above-average revenue collections have been debated. The economic recovery over the past two years and elevated inflation has contributed to rising incomes and business profits, which increases individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. collections. While how much each factor contributed to rising receipts is uncertain, strong federal revenue undercuts the argument that a lack of revenue is what is driving the projected increases in deficits.

2. Federal deficits will continue their rise over the next 10 years despite the end of pandemic relief

In 2021, the federal government’s budget deficit totaled $2.8 trillion after surpassing $3.1 trillion in 2020. As pandemic-related relief programs wind down and revenues come in stronger than expected, the CBO projects the deficit will fall to $1 trillion in 2022. Over the next decade, however, federal deficits will rise again: while revenues remain above the historical average and relatively steady, the CBO projects spending will grow relative to the size of the economy.

As a result, deficits will rise, reaching $2.3 trillion (6.1 percent of GDP) by 2032 and reaching a cumulative total of $14.5 trillion from 2022 through 2031. The cumulative 10-year deficit is $2.4 trillion more than the CBO projected in its last update, suggesting a worsening fiscal path, largely driven by legislative changes in the Bipartisan Infrastructure Package and the Consolidated Appropriations Act of 2022 that increased spending.

The projections for revenues, spending, and deficits assume current law changes, including the expirations of the 2017 Tax Cuts and Jobs Act (TCJA), occur as scheduled. If lawmakers diverge from current law and make changes without offsetting the costs, the fiscal picture will further deteriorate.

3. TCJA expirations lead to higher revenues and temporarily slower economic growth

The TCJA temporarily reduced individual income tax rates, widened brackets, and made a host of other changes to the individual income tax system with the net effect of reducing taxes for taxpayers across the income spectrum, on average. The individual tax cuts are scheduled to expire after the end of 2025 and as a result, the CBO projects revenues will rise sharply in 2026 and 2027 and remain elevated as individuals will face higher tax liabilities. In all, the TCJA expirations will boost annual receipts from individual income taxes relative to GDP by 0.8 percentage points after 2025.

On the business side, TCJA-related changes will also impact corporate revenues. For example, the phaseout of bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. by the end of 2026 and the requirement to amortize R&D expenses will temporarily boost corporate tax revenues as the timing of corporate deductions changes. Cutting the other way, the payments for the one-time tax on previously untaxed foreign earnings (deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. ) are scheduled to end after 2025, which will reduce corporate tax revenues.

Together, the expiration of the individual tax cuts and the phaseout of bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. will temporarily reduce economic growth, the CBO projects. If the tax changes were extended, however, it would significantly increase budget deficits. The CBO explains, “If the scheduled expirations did not occur and current tax policies were continued instead, much larger deficits and greater debt would result: By 2032, the deficit, measured as a percentage of GDP and including associated debt service costs, would exceed CBO’s baseline estimate by 1.1 percentage points.”


Over the next decade, despite elevated tax revenues, the CBO projects a deteriorating fiscal picture for the United States as spending will grow faster than revenues, pushing up budget deficits and increasing the federal debt.

Lawmakers will face many tough decisions, including how to approach the expiration and phase-out of the TCJA’s individual and business tax changes. Allowing the changes to expire will create a drag on growth, but extending them without offsets will significantly increase deficits above the $14.5 trillion CBO already projects will occur over the next 10 years.