Legislative update: CBO budget outlook, references to tax items

CBO budget outlook, references to tax items

The Congressional Budget Office (CBO) today released its semiannual report—The Budget and Economic Outlook: 2015 to 2025—covering the years 2015 through 2025.

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Overall, the CBO projects the federal budget deficit to hold steady relative to GDP through 2018 and then begin to grow thereafter.

Tax revenue

CBO makes this projection despite its estimate that tax revenue derived from individuals will increase relative to GDP during that time frame. Specifically, CBO believes that individual income will rise faster than inflation, thus creating bracket creep for many taxpayers.

Conversely, CBO predicts a decline in corporate income tax receipts from 2.3% of GDP to 1.8% of GDP through the 2017-2025 window. A number of specific causes for this decline were cited.

  • First, CBO predicts increased labor and interest costs will reduce corporate tax liability.
  • Second, CBO expects corporate tax revenue to decline due to certain tax “strategies.”

 

The CBO report notes:

 

One strategy is to continue decreasing the share of business activity that occurs in C corporations (which are taxed under the corporate income tax) while increasing the share that occurs in pass-through entities such as S corporations (which are taxed under the individual income tax rather than the corporate tax). 

Another strategy is to increase the amount of corporate income that is shifted out of the United States through a combination of more aggressive transfer-pricing methods and intercompany loans, additional corporate inversions, and other techniques.

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