Figure 14.

Shares of Income Taxed at Different Rates Under the Individual Income Tax System

Percent

The largest contributor to growth in revenues over the next 30 years is real bracket creep. That is the process in which, as income rises faster than inflation, a larger proportion of income becomes subject to higher tax rates. As the share of income taxed at higher rates grows, the share exempt from taxation shrinks.

Source: Congressional Budget Office.

In this figure, income refers to adjusted gross income—that is, income from all sources not specifically excluded by the tax code, minus certain deductions. The income tax rate is the statutory rate specified under the individual income tax system. The lowest statutory tax rate is zero (because of deductions and exemptions).

Scheduled Increases in Taxes After 2025. Another factor pushing up taxes relative to income is the scheduled expiration after calendar year 2025 of nearly all provisions of the 2017 tax act that affect individual income taxes. The provisions that are scheduled to expire include lower statutory tax rates, the higher standard deduction, the repeal of personal exemptions, and the expansion of the child tax credit.39 Those expirations would cause tax liabilities to rise in calendar year 2026, boosting individual income tax receipts relative to GDP by 0.9 percentage points between 2020 and 2030.

Other Factors. Many other factors affect revenues—but to a lesser extent—in the extended baseline projections. Initially, temporary tax provisions enacted in response to the pandemic and associated economic disruption are expected to significantly reduce receipts in 2020 and 2021. The expiration of those temporary provisions, taken together, is projected to boost receipts as a share of GDP by 1.3 percentage points between 2020 and 2030.

A different set of factors affects revenues over the longer term. One of those factors is taxable retirement income, which tends to grow more rapidly than GDP as the population ages. CBO expects the retirement of members of the baby-boom generation to cause a gradual increase in distributions from tax-deferred retirement accounts and traditional defined benefit pension plans, as well as taxable Social Security benefits.