The 2020 Long-Term Budget Outlook

Table 5.

Effective Marginal Federal Tax Rates Underlying CBO’s Extended Baseline Projections

Percent

Source: Congressional Budget Office.

The extended baseline projections, which generally reflect current law, follow CBO’s 10-year baseline budget projections and then extend most of the concepts underlying those projections for the rest of the long-term projection period.

The effective marginal federal tax rate on labor income is the share of an additional dollar of such income that is paid in federal individual income taxes and payroll taxes, averaged among taxpayers, with weights proportional to their labor income. The effective marginal federal tax rate on capital income is the share of the return on an additional dollar of investment made in a particular year that will be paid in taxes over the life of that investment. The before- and after-tax rates of return used to calculate that effective tax rate are weighted averages of the rates for every combination of asset type, industry, form of organization, and source of financing; the weights used are the asset values for each combination.

Sensitivity of Budget Projections to Changes in Underlying Economic Factors

CBO’s budget projections depend on its projections of economic factors, including economic growth and interest rates. To assess the sensitivity of its budget projections to those changes, CBO analyzed how its budget projections would change if productivity growth and interest rates were higher or lower (see Figure 15).41[30]

Figure 15.

Federal Debt if Total Factor Productivity Growth or Interest Rates Differed From the Values Underlying CBO’s Projections

Percentage of Gross Domestic Product

Source: Congressional Budget Office.

Total factor productivity growth is the growth of real output per unit of combined labor and capital services in the nonfarm business sector. The interest rate is the effective rate on federal debt.

TFP = total factor productivity.

Growth of Nonfarm Business Productivity

CBO examined the sensitivity of its projection of federal debt to changes in the growth rate of total factor productivity in the nonfarm business sector. The agency projected economic and budgetary outcomes using rates of growth for nonfarm business TFP that were 0.5 percentage points higher and 0.5 percentage points lower than the rate underlying the extended baseline projections. The range reflects the variation of about three-quarters of a percentage point in average TFP growth over 30-year periods between 1950 and the present and also the fact that such variation represents only some of the uncertainty about CBO’s projection of TFP growth.

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