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Letter to the Honorable Charles E. Grassley 1 (February 2006)

handle is hein.congrec/cbo8510 and id is 1 raw text is: OCONGRESSIONAL BUDGET OFFICE U.S. Congress Washington, DC 20515 February 23, 2006 Honorable Charles E. Grassley Chairman Committee on Finance United States Senate Washington, D.C. 20510 Dear Mr. Chairman: I am pleased to respond to your letter of February 10, 2006, inquiring about recent changes in the Congressional Budget Office's (CBO's) modeling assumptions and methods for projecting capital gains realizations. As reported in CBO's The Budget and Economic Outlook Fiscal Years 2007 to 2016, released in January, capital gains realizations in calendar year 2004 appear to have been much stronger than had previously been projected. To help put those realizations into perspective, this letter summarizes recent data on capital gains realizations, describes the methods that CBO uses to project such realizations, and discusses several improvements in those methods made in recent years. Despite those efforts, however, the accurate forecasting of capital gains realizations-which are highly volatile-continues to be extremely difficult. Recent Capital Gains Realizations and Tax Receipts The attached table shows capital gains tax rates, realizations, tax liahilities, and tax receipts since 1990. Data on capital gains realizations and taxes on those gains become available only with significant lags. Final information about realizations, which comes from tax returns, is now available only through 2003. Tax liabilities and receipts for 2003 as well as all tax-return information for 2004 are preliminary; that information does not include data from some late returns and is based on returns that have been compiled but that have not yet been edited. Values for 2005 are projected; actual data for that year will not be available until the Internal Revenue Service (IRS) receives and reviews the tax returns that will be filed this year. On the basis of CBO's extrapolation of the available data for 2004, it appears that realizations increased by about 80 percent from 2002 to 2004. www. cbo~gov

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