Trends in Federal Tax Revenues and Rates: CBO Senate Finance Testimony

CBO Director Doug Elmendorf's testimony before the US Senate Committee on Finance, "Trends in Federal Tax Revenues and Rates" on December 2, 2010.

The sum and substance is that Federal revenues average 18 percent of GDP (with occasional yearly highs to 21 percent), Federal spending will reach 24 percent of GDP in 2020, the top 20 percent of households earned 55 percent of before-tax income and paid almost 70 percent of federal taxes and all the other quintiles paid a lower share of federal taxes than their share of income. The CBO added a macro-economic note that lowering tax rates boosts economic activity. Federal spending has to be cut by at least 3 percent of GDP (if can achieve a sustained 21 percent of GDP tax revenues) or more likely 6 percent of GDP (since Federal revenues average 18 percent of GDP and spending will be 24 percent if unchecked). The Federal government must cut its spending by 12.5 to 25 percent to eliminate the deficit.

Highlights from the CBO's summary of the testimony:

Federal Revenues: Trends and Projections
Over the past 40 years, federal revenues have ranged from nearly 21 percent of gross domestic product (GDP) in fiscal year 2000 to less than 15 percent in fiscal years 2009 and 2010, averaging 18 percent of GDP over that span. Most of the revenues--about 82 percent in 2010--come from the individual income tax and the payroll taxes used to finance Social Security, Medicare, and the federal unemployment insurance program. Other sources of revenues include corporate income taxes, excise taxes, estate and gift taxes--all together about 13 percent of revenues in 2010--and nontax revenues such as earnings of the Federal Reserve System, customs duties, fines, and various fees.***CBO also projects that under current law, federal spending will decline for a few years relative to GDP and then increase again, reaching nearly 24 percent in 2020--slightly lower than the peak level of almost 25 percent in fiscal year 2009 but well above the average of roughly 21 percent over the past four decades.***As a result, even with the projected substantial increase in revenues, under current law deficits between 2015 and 2020 will range between 2.6 percent and 3.0 percent of GDP. If lawmakers extended most or all of the 2001 and 2003 tax cuts and made no other changes to taxes and spending, revenues would be lower and deficits would be significantly larger.***As a result, even with the projected substantial increase in revenues, under current law deficits between 2015 and 2020 will range between 2.6 percent and 3.0 percent of GDP. If lawmakers extended most or all of the 2001 and 2003 tax cuts and made no other changes to taxes and spending, revenues would be lower and deficits would be significantly larger.***Taxes have an effect on the economy in addition to the revenues collected because they cause people to alter their economic behavior, which generally results in a less efficient allocation of resources. Taxpayers can respond in three general ways to taxes: They can change the timing of their activities, for example by accelerating bonus payments or the sale of assets into this year if they think tax rates on earnings or capital gains will increase next year; they can adjust the form of their activities, for example by substituting tax-preferred fringe benefits for cash wages if the tax rate on wages increases; or they can change more fundamental aspects of their behavior, for example by working or saving less if tax rates on earnings or capital income increase.***On balance, the evidence suggests that reducing tax rates boosts work and saving relative to what would occur otherwise, if budget deficits are held the same.***The Tax Burden and Who Bears It
Households generally bear the economic cost, or burden, of the taxes that they pay directly, such as individual income taxes (including taxes paid on dividends, interest, and capital gains) and employees’ share of payroll taxes. Households also bear the burden of the taxes paid by businesses. In particular, in CBO’s judgment (and that of most economists), employers’ share of payroll taxes is passed on to employees in the form of lower wages. In addition, households bear the burden of corporate income taxes....***The share of taxes paid by the top fifth of the population grew sharply between 1979 and 2007. Almost all of that growth can be attributed to an increase in that group’s share of before-tax income. In 2007, households in the highest quintile earned 55 percent of before-tax income and paid almost 70 percent of federal taxes; for all other quintiles, the share of federal taxes was less than the share of income.

The complete CBO summary is available here.

Elmendorf's slide presentation to the US Senate Finance Committee follows:

Trends in Federal Tax Revenues and Rates

View more presentations from Congressional Budget Office.