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Four Tax Takeaways from the Most Recent CBO Report

By: Scott Greenberg

Today, the Congressional Budget Office released its semiannual Budget and Economic Outlook report, which forecasts the federal budget deficit over the next ten years, as well as several other economic indicators. An important part of this forecast is CBO’s projection of federal revenues, which determine whether the federal government will bring in enough money in 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. es to pay for its spending programs. Here are some of the conclusions that the CBO reached about federal taxes:

1. Tax collections have grown significantly in 2015.

In 2015, the CBO projects that the federal government will collect $3.251 trillion in revenues, an increase of 7.1% over the 2014 revenue figure of $3.021 trillion. To put this figure in context, federal revenues are now projected to amount to 18.2% of total economic output, up from 17.5% in 2014.

The biggest portion of the growth in federal revenues came from 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. es, which grew by 10.4% in 2015, to $1.540 trillion. Corporate tax revenues grew by 8.4% while payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. revenues grew by just 4.2%. These revenue increases have likely been driven by this year’s healthy economy, in the form of higher wages and salaries, greater returns to investment, and increased corporate profits. However, the growth in federal revenue has even outpaced overall economic growth in 2015, which CBO estimates as 3.2%.

2. This year’s growth in federal tax revenue was largely unexpected, and is the main reason why the deficit has fallen.

While today’s report forecasts that 2015 federal revenues will amount to 18.2% of GDP, last January, the CBO forecasted that this year’s federal revenues would only reach 17.7% of GDP – a difference of $62 billion. Between then and now, the CBO revised its revenue figures upward to reflect unexpectedly high tax collections in April.

The CBO also estimates that the federal deficit will fall from $485 billion in 2014 to $426 in 2015, a decrease of $59 billion. The size by which the deficit is projected to decrease this year is almost exactly the same as the amount of unexpected federal revenue the government took in ($62 billion). Indeed, the CBO’s report is clear that this year’s lower federal deficit is almost entirely due to higher tax collections.

3. In the next ten years, the individual income tax will become an increasingly important source of federal revenue.

This year, the individual income tax brought in $1.540 trillion in federal revenues, equivalent to 8.6% of GDP. But over the next ten years, the CBO projects that individual income tax revenues will continue to grow as a share of the economy, reaching 9.5% of GDP in 2025. This implies that the CBO expects individual income tax collections to grow faster than the overall economy, at an average rate of 4.9% each year.

One of the main reasons for the growth in individual income tax collections over time, according to the CBO’s report, is “real bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. ”: as the economy grows and taxpayers become wealthier, they are pushed into higher tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s and have to pay higher rates. While income tax brackets are indexed to annual 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. , they are not adjusted for economic growth, leading to a higher income tax burden as the economy grows.

Notably, the CBO forecasts that corporate taxes will become significantly less important over time as a source of federal revenue. The CBO estimates that corporate tax revenues will peak at 2.4% of GDP in 2016 and decline to 1.8% of GDP by 2025.

4. Over the next ten years, federal revenues will be higher than the historical average.

Over the last fifty years, on average, the federal government has collected 17.4% of GDP in revenues. Yet over the next ten years, the federal government is expected to take in 18.3% of GDP in revenues, nearly a whole percentage point higher than the historical average. The CBO forecasts that, in 2016, the federal government will collect 18.9% of GDP in taxes, higher than any year since 2000.

In short, the federal government is set to collect a lot of taxes over the next ten years.