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Letter from Douglas W. Elmendorf, Director to Brian P. Bilbray regarding recent changes in the composition of federal revenues, the effects of scheduled increases in tax rates on capital gains, and the effects of recent changes to private-sector risk models 1 (September 2009)

handle is hein.congrec/cbo10359 and id is 1 raw text is: OCONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 September 25, 2009 Honorable Brian P. Bilbray U.S. House of Representatives Washington, DC 20515 Dear Congressman: I am pleased to respond to your questions about recent changes in the composition of federal revenues, the effects of scheduled increases in tax rates on capital gains, and the effects of recent changes to private-sector risk models. Composition of Federal Revenues As a result of the economic downturn, CBO expects revenues from individual and corporate income taxes in 2009 to account for about 50 percent of total revenue, below the average of about 57 percent over the past five years. It is not unusual for income tax revenues to account for a smaller share of total revenues in recessions because of sharp declines in major components of the income tax bases, namely corporate profits and non-wage personal income (such as capital gains realizations, business- related incomes, dividends, and interest). Social insurance (payroll) tax receipts are expected to account for a higher-than-normal share of total revenues because wages and salaries, the main components of the payroll tax base, are expected to decline much less in this recession than corporate profits and non-wage personal income. As the economy gradually recovers from the economic downturn, CBO expects corporate profits and non-wage personal income to recover, boosting the share of total revenue from individual and corporate income taxes. Information from tax returns necessary to identify the sources of income responsible for the decline in income tax receipts in 2009 will become available over the next couple of years. That information will include changes in the distribution of personal income among taxpayers with different amounts of income and who thus face different tax rates. CBO anticipates that those data will show that although the recession has harmed

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