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Revenue Projections and the Stock Market [i] (December 2002)

handle is hein.congrec/cbo0732 and id is 1 raw text is: REVENUE AND TAX POLICY BRIEF A series of issue summaries from C B O the Congressional Budget Office No. 3, December 20, 2002 Revenue Projections and the Stock Market The recent gyrations of the stock market, combined with large reductions in projected federal revenues, have invited speculation about the sensitivity of federal receipts to the market's movements. Observers have pointed to the rapid rise in the value of stocks as a likely source of the late 1990s' surge in revenues relative to gross domestic product (GDP). And the drop in receipts in fiscal year 2002 in the wake of the market's decline seems to be consistent with a stock market/revenue link. Information on stock prices is a useful adjunct to the projection of Incomes that CBO employs to produce a revenue forecast. Although the growth of the federal tax base is primarily driven by overall economic activity, a number of components of the base, such as capital gains, respond to changes in the prices of stocks. But the stock market and the economy do not move in tandem. Equity prices have a tendency to drop when the economy is in or about to fall into a recession. Yet similar drops occur in the stock market at other times as well. Over long periods, the real value of the market may decline (such as in the 1970s) as the economy continues to grow (see Figure 1). And the market may also rise much faster than the economy does (as in the 1990s). Figure 1. GDP and the Value of Corporate Equities, 1952 to 2001

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