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TAX FACTS: CBO Sees Continued Individual Income Tax Revenues January 24, 2007

Posted by notapundit in Economic News.
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WASHINGTON (Dow Jones)–Individual income tax revenues are set to grow by about 10% in 2007 and 2008 due to rising incomes, retirees who tap savings plans and growth of the Alternative Minimum Tax, the Congressional Budget Office said Wednesday.

The CBO, in its latest budget and economic outlook, projects individual income taxes will grow by 9.6% in 2007 and by 10.0% in 2008, before dropping off to a 4.1% growth rate in 2009.

Overall, CBO is projecting federal revenues will grow faster than gross domestic product for a third consecutive year. Total tax revenues were 18.4% of GDP in 2006 and are projected to rise to 18.6% of GDP in 2007 and 19.0% in 2009. Growth in individual income taxes will drive this trend.

Total federal revenues are to total $2.5 trillion in 2007, an increase of $136 billion from 2006. Trends in individual income tax growth continue to drive the trend, CBO said.

“Real bracket creep, growth in retirement income subject to taxation upon withdrawal, and the increased effect of the AMT will cause revenues to grow more strongly than output for the 10-year projection period,” CBO said. Bracket creep refers to taxpayers being pushed into higher tax brackets due to inflation.

Individual income tax gains will be driven by the projected expiration in 2008 of a temporary fix to the AMT, CBO said. This projection, however, might not pan out, since Congress has approved temporary extensions of the higher AMT limits to prevent taxpayers from being captured by the tax.

The AMT was created in 1969 in order to ensure the wealthy don’t evade taxes. It was never indexed for inflation and now the AMT affects some 4 million taxpayers, a growing number of whom are middle income families.

Revenues from the AMT will jump from $25 billion in 2007 to $90 billion in 2008, CBO said. “With no change in law, the number of taxpayers subject to the AMT is expected to rise from 4 million in 2006 to 39 million by 2017,” the agency said.

After 2008, CBO warned it expects the rapid growth of revenues will come to an end amid projections for slower economic growth and corporate profits returning to their historical normal patterns. It also mentioned the end of the federal excise tax on long distance telephone service as affecting revenues.

The CBO outlook shows growth of corporate profits is projected to slow relative to the overall economy in the next decade amid slower economic growth.

In recent years, corporate tax receipts have been rising strongly; they were up 27% to $354 billion in 2006. CBO projects that corporate tax revenues will increase by 4.1% in 2007, rising to $368 billion.

Income from capital gains taxes has been high in recent years, but CBO expects after 2006, “capital gains will rise more slowly than GDP and gradually return to their long-run average level.” From 2007 to 2017, capital gains realizations are projected to grow at an average annual rate of less than 0.5% per year.

By Rob Wells, Dow Jones Newswires

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