The Sources and Underlying Causes of the Growth in Tax Revenues Since 2003
An email points me to this CBO report on the sources and causes of changes in tax revenue since 2003. The bottom line: the main source of the growth is corporate tax revenues, the bulk of which are from increased corporate profits. For personal income taxes, the report notes that the tax base for the personal income tax fell because "wages and salaries ... fell relative to GDP." Tax increases came from "higher realizations of capital gains (including any effects associated with legislated reductions in tax rates)," and "bracket creep":
Congressional Budget Office, Peter R. Orszag, , Director U.S. Congress, Washington, DC 20515: Dear Mr. Chairman [The Honorable Kent Conrad, Chairman of the Committee on the Budget]:
In response to your letter of May 11, 2007, the Congressional Budget Office (CBO) has reviewed the available data and analyzed the sources and underlying causes of the growth in revenues since 2003. This analysis shows that the overall increase in revenues as a share of gross domestic product (GDP) since 2003 is disproportionately accounted for by increases in corporate income tax revenues.
Growth in Federal Tax Revenues From 2003 to 2006 Total federal revenues grew by about $625 billion, or 35 percent, between fiscal year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since 2003 is necessarily preliminary because relevant data are not yet fully available. ... Had revenues grown at the same rate as the overall economy between 2003 and 2006, federal receipts would have increased by only $373 billion. The other $252 billion of the actual increase in revenues represents growth in excess of GDP growth. As a result, receipts as a share of GDP rose ...[by] an increase of 1.9 percentage points (see Table 1, attached).
Sources of Growth in Tax Revenues That increase of 1.9 percentage point of GDP can be traced to changes in different types of revenues (see Table 2). The bulk of the revenue increase was associated with corporate income taxes... That increase of 1.5 percentage points of GDP in corporate income tax revenues accounts for the bulk of the overall 1.9 percentage point rise in revenues. Revenues from individual income taxes increased 0.6 percentage points... And revenues from taxes other than corporate and individual income taxes were relatively stable.., slipping 0.2 percentage points...
Corporate Income Tax Revenues. Roughly two-thirds of the increase of 1.5 percentage points in corporate income taxes relative to GDP can be attributed to increases in corporate profits...
Individual Income Tax Receipts. The 0.6 percentage-point increase in individual income tax receipts was the combined result of some factors that acted to reduce those revenues relative to GDP and others that acted to raise them. The NIPA measures of income that constitute the underlying base of the individual income tax—principally wages and salaries—fell relative to GDP, reducing receipts relative to GDP by 0.4 percentage points. ...[T]he impact of legislation enacted over the period—including increases in the child credit and reduced tax rates on dividends—reduced revenues by 0.5 percentage points relative to GDP. In the other direction, higher realizations of capital gains (including any effects associated with legislated reductions in tax rates) added 0.3 percentage points.... The remainder of the increase in individual revenues relative to GDP, measuring 1.1 percentage points, resulted from “real bracket creep” and a variety of potential factors that cannot be evaluated fully until more complete data are available. Such potential factors include shifts in the share of aggregate taxable income accruing to households with higher marginal tax rates; changes in taxable incomes relative to the NIPAs’ measures of personal incomes; and changes in retirement income, the alternative minimum tax, and tax deductions.
Other Revenues. The decline of 0.2 percentage points in the remaining revenues was largely from lower wages and salaries as a share of GDP, which reduced receipts from social insurance (payroll) taxes relative to GDP.
This is a part of the report I want to highlight. It notes that the cause of the increase in tax revenues is not known and cannot be determined at this time. Thus, anyone who tells you that the increase in revenue is a consequence of tax cuts, and I've heard that claim a lot, is making it up - there's no way to determine the source of the revenue growth until more data are available. What we do know is that no tax cut in the past has ever come close to paying for itself, and there's little if any chance this episode will be any different:
Tax Revenues in 2007 ...The inclusion of 2007 ... does not seem to alter the fundamental conclusion that a substantial share of the revenue increase relative to GDP is associated with the corporate income tax. Two caveats to this analysis should be noted. First, analyzing revenues as a share of GDP does not illuminate the underlying causes of GDP growth itself, including the possible influence on GDP from tax policy. Second, the detailed data required for more systematic analysis of revenue trends are not yet available. For example, detailed data based on tax returns provide the best basis for tracing sources of revenue trends, but those data are typically not available until about two years after collections occur. In addition, revisions to NIPA data can profoundly affect the interpretation of revenue trends.
If you or your staff have any questions about this analysis or would like further information, please call me... Sincerely, Peter R. Orszag...
Keeping in mind that "analyzing revenues as a share of GDP does not illuminate the underlying causes of GDP growth itself, including the possible influence on GDP from tax policy," here's the claim that tax cuts were the source of revenue growth alluded to above:
Back to Balance?, by James C. Capretta, NRO Online: Many Americans would be surprised to learn that the ... gap between federal revenue and spending continues to narrow... [T]oday’s more favorable fiscal outlook is due almost entirely to the remarkable economic performance that has taken place since the 2003 tax cuts were signed into law. ...
Though the data to support that claim is not available, we do have one more piece of information to consider. Most economists do not believe that the tax cuts from 2003 had anything to do with the increase in economic growth we have seen since, so even that claim is quite questionable, let alone the claim that tax cuts induced enough economic growth to increase tax revenues. Some economists, Chris Sims being one of them, even believe the tax cuts probably reduced economic growth.
Posted by Mark Thoma on Friday, May 18, 2007 at 01:56 PM in Budget Deficit, Economics, Taxes |
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