Saturday, May 7, 2011

The flaws in the CBO's projections

The CBO projects that tax revenue will increase from 14.8% of GDP in 2011 ($2228 B) to 19.9% of GDP in 2014 ($3442 B). This is an increase of 54% in nominal dollar amounts in only 3 years.

This is based mostly on assumptions that the 2011 2% payroll tax cut will expire, that any provisions limiting the scope of AMT end on 12/31/11, and that extensions of the lower Bush tax cuts end on 12/31/12.

I agree that the 2% payroll tax cut is likely to expire; however, the CBO is projecting that unemployment will suddenly drop to 5.3% on 1/1/13, which is unlikely. In any event, this expiring tax cut will provide only an additional $112B.

The CBO projects that the AMT will suddenly dramatically expend in scope. "The current version of the patch will expire at the end of 2011. As a result, the number of taxpayers affected by the AMT will jump from about 4 million in calendar year 2011 to about 33 million in 2012 ... and receipts from the AMT will almost quadruple ...". The truth is that the AMT is very unpopular and Congress has passed one year "patches" for the last ten years in a row, and they will likely do so again in the future.

As for the Bush tax cuts, Obama wants to continue them for lower and middle-class taxpayers and he wants them to end for the "rich", defined as individuals who make more than $200,000 and couple who make more than $250,000. If I understand this right, then this means those in the 33% and 35% brackets would have their taxes raised to 36% and 39.6% respectively. I doubt that a 10% increase in taxes on a limited group of people would raise revenues by 34% in one year (from $1128B in 2012 to $1516B in 2013).

So, in conclusion, the CBO revenue projections are very unrealistic and it is much more likely that revenue in 2014 will be only $2711B (my projection) instead of $3442B.

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