Where Did the Revenues Go? Or What Goes Up…

Between fiscal year 2000 and fiscal year 2003, federal revenues fell by $243 billion, putting them at their lowest level relative to GDP in over 40 years. The decline in revenues came after a period of rapidly rising revenues between 1994 and 2000. This paper looks at the sources of the decline in revenues in the last three fiscal years and contrasts them with the sources that contributed to the rise in revenues in the previous six years. Individual income tax receipts explain much of the rise and fall in the last nine years. Differences in aggregate economic growth explain some of the difference in revenue growth between the two periods. The differences in aggregate economic growth were reinforced by the fact that receipts grew more quickly than the aggregate economy in the first period and declined more quickly in the latter period. Rapid growth in tax return incomes and an increase in the share of income taxed at higher marginal tax rates explain much of the rise in personal income tax receipts relative to the economy in the first period. A reversal of these trends along with tax cuts enacted after 2000 explain much of the decline in the latter period.