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This memorandum is a companion to the recent Congressional Budget Office (CBO) memorandum, "Major Legislative Changes in Human Resource Programs Since January 1981" (August 1983), which estimates the effects on budget outlays of policy changes since 1981.¹ It revises the revenue estimates provided in the CBO memoranda of February 1982 and November 1982,² which respectively estimated the distributional effects of the tax and benefit reductions enacted in 1981 and 1982. In order to be consistent with the estimates of benefit reductions contained in the August 1983 memorandum, the revenue estimates presented here are based on the CBO economic assumptions of February 1983.

The revenue estimates presented here reflect actual economic conditions since 1982--the signal feature of which, for this analysis, was the effect of the recession in depressing personal income growth. In particular, the estimates of the revenue effects (in dollars) of the Economic Recovery Tax Act of 1981 (ERTA) across-the-board rate cuts presented here are smaller than those provided in February 1982.

These revenue estimates, however, are static estimates: they are based on the somewhat arbitrary assumption that such changes in the tax code do not have significant effects on general taxpayer behavior or otherwise on the economy at large, and that they do not have significant effects on other budget policies or on the stance of monetary policy. These assumptions limit the value of the revenue estimates for assessing the ultimate effects of such fiscal policy initiatives; however, they facilitate the comparison of these estimates with other budget estimates, which are generally calculated in the same manner.³

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1. The budget outlay estimates presented in the August 1983 memorandum are calculated on a fiscal year basis. The estimates presented here are on a calendar year tax liability basis. The basic data used for this analysis are tax returns grouped by expanded income categories. (Expanded income is defined as adjusted gross income plus excluded capital gains and certain tax preference items, less investment interest to the extent of investment income.) These return data are reorganized to form households using the results of a procedure developed by the U.S. Bureau of the Census (see After-Tax Money Income Estimates of Households; 1981, Current Population Reports, Special Studies Series, P-23, No. 132). To conform with most other tax distribution studies, movement over time by taxpayers into higher tax rate brackets is simulated by adjusting the number of households in each income category each year. Previous CBO studies have assumed the share of households contained in each income group is relatively constant year after year.

To consider the combined effects of the outlay and revenue changes CBO has examined, adjustment of both sets of estimates is necessary. A forthcoming CBO report will sum the individual estimates and outline the resulting effects on different income groups.

2. See CBO, "Effects of Tax and Benefit Reductions Enacted in 1981 for Households in Different Income Categories," Special Study (February 1982), and CBO, "Effects of Changes in Taxes and Benefit Payments Enacted in Fiscal Year 1982 for Households in Different Income Categories," Special Study (November 1982). (A detailed presentation of general definitions and limitations, along with further discussion of the methodological problems associated with such estimates, may be found in the February 1982 memorandum.)

3. The likely behavioral responses of both taxpayers and the monetary authority to such tax law changes are subjects of considerable controversy. If such static assumptions are not employed, a wide range of behavioral responses should be assessed.