Individual income taxes will routinely amount to more than 10% of GDP in the decades to come, surpassing even 2022 when a near-record surge drove collections past that mark for the first time, according to new data from the Congressional Budget Office.
Individual income tax collections amounted to an average of 8% of GDP during the 30 years ending in 2022. But that figure, fueled by capital gains and the repayment of pandemic-deferred taxes, jumped to 10.5% for fiscal 2022, the highest in the 89 years the federal government has compiled the figure and the first time it crested 10%.
In “The 2023 Long-Term Budget Outlook,” released June 28, the CBO projects that after returning to single digits in the short run, individual tax collections will rise to 10.1% of GDP by fiscal 2043 and 10.7% by fiscal 2053.
In the next few years, individual income taxes will drop below 10% of GDP again mainly because the capital gains realizations and other factors that drove the 29% surge in tax collections in 2022 will recede, the agency projects.
Two factors — real bracket creep and the expiration of the individual tax provisions of the Tax Cuts and Jobs Act at the end of 2025 — will start pushing taxes as a share of GDP upward again. The CBO’s long-term projections are based on current law, so they do not assume Republicans will succeed at making the TCJA’s provisions permanent or that a compromise will be reached with Democrats to retain lower tax rates for some brackets.
The projections after 2025, therefore, are based on higher individual tax rates, a smaller standard deduction, a return of personal exemptions, and a return of the child tax credit to $1,000 per child.
The CBO recently rescored the cost of extending the TCJA provisions at $3.5 trillion over 10 years. If the individual tax provisions in the TCJA expire as scheduled, that would add 0.8 percentage points to the long-term estimate of individual income taxes as a percentage of GDP, the report said. So if the provisions were extended, individual income taxes as a percentage of GDP would likely fall below 10% in both the 20- and 30-year projections.
An even bigger impact — nearly 2 percentage points — comes from real bracket creep, the report said. While tax brackets are adjusted for inflation, tax revenue still increases as incomes rise faster than prices. The CBO projects that 9% of income will be subject to the top marginal rate in 2033, but that will jump to 11% by 2053.
Besides the extension of TCJA provisions, there are other factors that could lower the share of taxes paid by individuals, including a long-term trend in compensation driven by increasing healthcare costs. Over the projection period, the CBO expects a greater share of compensation will be via untaxed fringe benefits while a lessening share will be in the form of taxed compensation.
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