Why individual tax revenue will grow even if Congress doesn't raise taxes

With income growing faster than inflation and myriad other factors, real tax creep will result in individual tax increases whether or not Congress officially raises taxes.

The other day, I wrote about new Congressional Budget Office estimates that individual income tax revenues are likely to grow significantly over the next decade. A new paper by my Tax Policy Center colleagues Jim Nunns and Jeff Rohaly shows the importance of this trend through the rest of the century and explains in valuable detail why it is happening.

Jim and Jeff figure that as a share of the economy, individual income tax revenues will grow from about 9.5 percent in 2025 to 13.3 percent in 2090, which is the last year of the Congressional Budget Office’s annual projections. That’s more than 3.7 percent of Gross Domestic Product, or a roughly 40 percent increase.

The major culprit, as CBO also concluded, is a phenomenon known as real bracket creep. TPC figures this, along with the failure to index key parts of the income tax, will drive 80 percent of the growth in individual income taxes as a share of GDP.

No, real bracket creep isn’t they guy who won the March madness pool three years in a row—and gloated about it. Instead, it is the result of an imperfect effort to protect increases in income from automatic tax hikes.

Since 1985, income tax brackets have been adjusted for inflation so that someone whose annual raise tracks the Consumer Price Index is not thrown into a higher tax bracket. However, that adjustment doesn’t fully protect rising income from higher taxes.

In part, that’s because some key parts of the income tax are not indexed. They include the child tax credit, the surtax on net investment income, and the income ceiling for making contributions to Individual Retirement Accounts. But the real problem is that when income grows faster than inflation, it is pushed into higher tax brackets.

Similarly, other elements of the income tax, such as the standard deduction and the personal exemption, also increase more slowly than income, driving up average tax rates.

Jim and Jeff identified some other, less important causes. For example, because incomes for those at the top of the economic food chain are likely to grow faster than the average, more income will be pushed into the top brackets. In addition, Jim and Jeff project an increase in the number of single taxpayers through the century. And on average singles pay higher taxes than married couples with the same income.

These projections reach out a very long time into the future, and a lot can happen between now and 2090. But as lawmakers debate the future of the tax code, they should keep in mind this large projected increase in individual income tax revenues, think about who it benefits, and what, if anything, they want to do about it.

The post Why Individual Tax Revenues Will Grow Even If Congress Doesn’t Raise Taxes appeared first on TaxVox.