The 2020 Long-Term Budget Outlook

A second factor is change in the distribution of earnings. Earnings are projected to grow faster for higher-earning people than for other people over the next 30 years. That trend would cause a larger share of individual earnings to be taxed at higher rates. However, the resulting increase in individual income tax revenues would be largely offset by a decrease of nearly the same amount in payroll tax receipts, CBO projects, because the share of earnings above the maximum amount subject to Social Security payroll taxes would grow. Workers do not accrue additional Social Security benefits for earnings above the maximum taxable amount. For a given total amount of earnings, therefore, an increase in the share above the limit would reduce overall future benefit payments.

A third factor is growth in health care costs, which is projected to reduce revenues as a share of GDP over the next three decades. The share of employees’ compensation that is paid in the form of wages and salaries, which are subject to income and payroll taxes, is projected to decline because of rising spending on fringe benefits (such as employment-based health insurance), which are not taxable. That shift in compensation would decrease taxable income—and thus revenues from both income and payroll taxes—relative to GDP.

Implications for Effective Tax Rates

Taken together, those factors would, under current law, cause the tax system in 2050 to differ substantially from the system today. On average, taxpayers across the income distribution would pay more of their income in taxes in 2050 than similar taxpayers do now if current laws generally remained unchanged. Furthermore, a larger share of each additional dollar of income that households earned would go toward taxes because the effective marginal federal tax rate on labor would rise (see Table 5). The effective marginal tax rate on capital would also rise but by a smaller amount. Higher marginal rates would dampen economic activity and investment by reducing people’s incentives to work and save.40[29]

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