Congressional Budget Office
Director's Blog

I testified about CBO’s Budget and Economic Outlook to the House Budget Committee yesterday morning and to the Senate Budget Committee this morning. In both testimonies I highlighted several points from the Outlook:

• Under current law, CBO projects that the budget deficit this year, will be about $1.3 trillion, or more than 9 percent of the country’s total output. Looking beyond this year, the budget outlook is daunting: Under current law, CBO projects that the deficit will drop to about 3 percent of GDP by 2013 but remain in that neighborhood through 2020. By that point, interest payments alone would cost more than $700 billion per year.
• Maintaining the policies embodied in current law that underlie these projections would not be easy. It would mean, for example, allowing all the tax cuts enacted in 2001 and 2003 to expire in 2011 as scheduled and not extending the temporary changes that have kept the alternative minimum tax, or AMT, from affecting more taxpayers. If, instead, policymakers extended all of the 2001 and 2003 tax cuts, indexed the AMT for inflation, and made no other changes to revenues or spending, the deficit in 2020 would be twice the size of the deficit projected under current law. Debt held by the public would equal 87 percent of GDP and be rising rapidly. As another example, the baseline projections assume that annual appropriations will rise only with inflation. If, instead, policymakers increased such spending in line with GDP—which is about what actually happened over the past 20 years (leaving aside the stimulus package)—the deficit in 2020 would be two-thirds again as large as projected under current law.
• Forecasts of budget and economic outcomes are highly uncertain. Actual deficits could be significantly smaller than we project—or significantly larger. We believe that our projection balances those risks.
• One set of factors contributing to the bleak budget outlook are the financial crisis and severe recession, along with the policies implemented in response. Unfortunately, CBO expects that the pace of economic recovery in the next few years will be slow. Households’ spending is likely to be dampened by weak income growth, lost wealth, and constraints on their ability to borrow. Investment spending will be slowed by the large number of vacant homes and offices. In addition, although aggressive action by the Federal Reserve and the fiscal stimulus package helped moderate the severity of the recession and shorten its duration, the support to the economy from those sources is expected to wane.
• CBO expects that it will take considerable time for everyone looking for work to find jobs, and we project that the unemployment rate will not return to its long-run sustainable level of 5 percent until 2014. Thus, more of the pain of unemployment from this downturn probably lies ahead of us than behind us.
• A large and persistent imbalance between federal spending and revenues is apparent in CBO’s projections for the next 10 years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems from policy choices made over many years. As a result of those choices, U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.
   

Today CBO released a letter to Congressman Paul Ryan, Ranking Member of the House Budget Committee, analyzing the Roadmap for America’s Future Act of 2010. This legislation, which Congressman Ryan introduced today, would make comprehensive changes to the Social Security program; to federal involvement in health care, including Medicare, Medicaid, and the tax treatment of health insurance; to other federal spending; and to other features of the tax system. CBO’s analysis is based on the proposal as modified by specifications provided by Congressman Ryan’s staff. In particular, the specifications for Medicaid and the tax system that CBO analyzed are highly stylized versions of the more detailed provisions in the bill.

CBO’s letter summarizes the agency’s analysis of the impact that the bill (along with the simplifying specifications) would have on federal outlays, budget deficits, and debt during the next 75 years. The analysis is subject to a great deal of uncertainty, because of both the complexity of the proposal and the very long time horizon over which its many provisions would unfold. The analysis does not represent a cost estimate for the legislation, which would require much more detailed analysis and would be much more limited in the time span that could be examined.

The Roadmap, in the form that CBO analyzed, would result in less federal spending for Medicare and Medicaid as well as lower tax revenues than projected under CBO’s “alternative fiscal scenario” described in CBO’s June 2009 publication The Long-Term Budget Outlook. Federal spending for Social Security would be slightly higher than under CBO’s alternative fiscal scenario for much of the projection period, but the system would become sustainable as revenues increase and traditional benefits decline. The budget deficit would peak at 5 percent of GDP in 2034 and then decline. By 2080, the Roadmap would generate a budget surplus of about 5 percent of GDP. Under the Roadmap, the ratio of government debt held by the public to economic output (the ratio of debt to GDP) would be lower than that under the alternative fiscal scenario in every year. In particular, debt is projected to peak at 100 percent of GDP in 2043 and to decline thereafter, reaching zero by 2080. (Debt held by the public was about 53 percent of GDP at the end of fiscal year 2009.) The federal government would accumulate net financial assets equal to 17 percent of GDP by 2083. In contrast, under the alternative fiscal scenario, debt is projected to skyrocket over the next several decades.

This analysis was undertaken by Joyce Manchester, Charles Pineles-Mark, Michael Simpson, and Julie Topoleski of CBO’s Long-Term Modeling Group.
 

CBO projects that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2 percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4 trillion) posted in 2009. Last year’s deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year’s shortfall.

The large 2009 and 2010 deficits reflect a combination of factors that are discussed in CBO’s Budget and Economic Outlook: Fiscal years 2010-2020.  Those factors include: an imbalance between revenues and spending that predates the recession and turmoil in financial markets, sharply lower revenues and elevated spending associated with those economic conditions, and the costs of various federal policies implemented in response to those conditions.

The deep recession that began two years ago appears to have ended in mid-2009. Economic activity picked up during the second half of last year, with inflation-adjusted GDP and industrial production both showing gains. Still, GDP remains roughly 6½ percent below CBO’s estimate of the output that could be produced if all labor and capital were fully employed (that difference is called the output gap), and the unemployment rate—at 10 percent—is twice what it was two years ago. 

Economic growth in the next few years will probably be muted in the aftermath of the financial and economic turmoil. Experience in the United States and in other countries suggests that recovery from recessions triggered by financial crises and large declines in asset prices tends to be protracted. Also, although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane. Furthermore, spending by households is likely to be constrained by slow growth of income, lost wealth, and constraints on their ability to borrow, while investment spending will be slowed by the large number of vacant homes and offices.
 
Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011–2020 period. As a share of GDP, deficits drop markedly in the next few years but remain high—at 6.5 percent of GDP in 2011 and 4.1 percent in 2012, the first full fiscal year after certain tax provisions originally enacted in 2001, 2003, and 2009 are scheduled to expire. Thereafter, deficits are projected to range between 2.6 percent and 3.2 percent of GDP through 2020.

Those accumulating deficits will push federal debt held by the public to significantly higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects that the government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms (from $207 billion to $723 billion) and will more than double as a share of GDP (from 1.4 percent to 3.2 percent).

Moreover, CBO’s baseline projections understate the budget deficits that would arise under many observers’ interpretation of current policy, as opposed to current law. In particular, the projections assume that major provisions of the tax cuts enacted in 2001, 2003, and 2009 will expire as scheduled and that temporary changes that have kept the alternative minimum tax (AMT) from affecting many more taxpayers will not be extended. The baseline projections also assume that annual appropriations rise only with inflation, which would leave discretionary spending very low relative to GDP by historical standards. If the tax cuts were made permanent, the AMT was indexed for inflation, and annual appropriations kept pace with GDP, the deficit in 2020 would be nearly the same, historically large, share of GDP that it is today.

To learn more about the economic and budget outlook and better understand how different policies affect CBO’s baseline projections, please see our new webpage.
 

What amount of budgetary resources might be needed in the long term to carry out the Administration’s plans for defense that were proposed during 2009? CBO addresses that question in a study prepared at the request of the Chairman and the Ranking Member of the Senate Budget Committee. The study updates the resource projections contained in CBO’s January 2009 paper Long-Term Implications of the 2009 Future Years Defense Program, reflecting changes that the new Administration made to defense plans in preparing the President’s budget request for fiscal year 2010.

In CBO’s estimation, carrying out the Department of Defense's (DoD’s) 2009 plans for 2010 and beyond—excluding overseas contingency operations (the wars in Iraq and Afghanistan and some much smaller military actions elsewhere)—would require defense resources averaging at least $573 billion annually (in 2010 dollars) from 2011 to 2028. That amount, CBO’s base projection, is about 7 percent more than the $534 billion in total obligational authority the Administration requested in its regular 2010 budget, again excluding overseas contingency operations.  The projection also exceeds the peak of about $500 billion (in 2010 dollars) during the height of the Reagan Administration’s military buildup in the mid-1980s. During that period, for example, DoD was pursuing a Navy fleet of 600 battle force ships, more than twice the size of the current fleet of 287.

The department’s resource requirements to execute the same plans could be even greater. CBO has also estimated some “unbudgeted” costs that reflect the likelihood that weapon systems would cost more than initially estimated; that medical costs and fuel prices would grow at rates faster than DoD has anticipated; and that pay raises the Congress enacts for military personnel and DoD’s civilian employees might exceed the percentages in the department’s plans. Furthermore, additional appropriations may be necessary to fund overseas contingency operations.

Including the unbudgeted costs increases the projection to an annual average of $632 billion through 2028, or 18 percent more than the regular funding requested for 2010. Some 35 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations; in particular, the analysis includes the potential costs—about $20 billion per year—of deploying 30,000 troops to contingency operations from 2013 through 2028. The total costs of $670 billion at the endpoint in 2028 would approach the peak of the past three years (measured in 2010 dollars), which includes the height of operations in Iraq.

Not included in the unbudgeted cost projections, however, is the funding needed to increase U.S. presence in Afghanistan as the President announced on December 1, 2009.  Although the Administration’s 2010 budget planned for an increase in U.S. service members in Afghanistan from 59,000 to 68,000, neither that budget nor CBO’s projection anticipated the further increase of 30,000 troops in Afghanistan. (See CBO’s recent analysis of the funding needed to support an additional 30,000 troops in Afghanistan.)

This study was prepared by a team led by Matthew Goldberg; the primary authors were Adam Talaber and Daniel Frisk of CBO’s National Security Division.
 

Yesterday CBO senior analyst Eric Labs testified before the House Armed Services Committee’s Subcommittee on Seapower and Expeditionary Forces to discuss the challenges that the Navy is facing in its plans for building its future fleet. Specifically, the testimony focused on three matters: the Navy’s draft shipbuilding plan for fiscal year 2011; the effect that replacing Ohio class submarines (certain submarines that carry ballistic missiles) with a new class of submarines will have on the Navy’s shipbuilding program; and the number of ships that may be needed to support ballistic missile defense from the sea. CBO’s analysis of those issues indicates the following:

• If the Navy receives the same amount of money (adjusted for inflation) for ship construction in the next 30 years that it has over the past three decades—an average of about $15 billion per year in 2009 dollars—it will not be able to execute its fiscal year 2009 plan to increase the fleet from 287 battle force ships to 313. As a result, the draft 2011 shipbuilding plan drastically reduces the number of ships the Navy would purchase over 30 years, leading to a much smaller fleet than today’s fleet or the one envisioned in the 2009 plan.
• The draft 2011 shipbuilding plan increases the Navy’s stated requirement for its fleet from 313 ships to 324 through 2040, but the production schedule in the plan would buy only 222 ships, too few to meet the requirement.  The reduction would come from the Navy’s combat ships.  By 2040, the fleet would decline to 237 ships: 185 combat ships and 52 logistics and support ships.  In comparison, today’s fleet has 287 ships:  239 combat ships and 48 logistics and support ships.
• CBO’s preliminary estimate is that implementing the draft 2011 shipbuilding plan would cost an average of about $20 billion per year (in 2009 dollars) for all activities related to ship construction (including modernizing some current surface combatants and refueling ships’ nuclear reactors). A more detailed estimate will follow after the Navy formally submits its final 2011 plan to the Congress in February with the President’s budget request.
• Replacing the 14 ballistic missile submarines (SSBNs) of the Ohio class—which are due to start reaching the end of their service lives in the late 2020s—with 12 new SSBNs could cost about $85 billion.
• Sea-based ballistic missile defense, a relatively new mission for the Navy, could require a substantial commitment of resources. That commitment could make it difficult for the Navy to fund other ship programs.

The number of people who will be subject to the alternative minimum tax (AMT) will increase dramatically in 2010 under current law. About 4.5 million taxpayers were affected by the AMT in 2009. That number has been kept relatively small by annual modifications to the AMT rules, but the most recent modifications expired at the end of calendar year 2009. Consequently, about 27 million taxpayers (see figure below)—one out of every six taxpayers—will be affected by the AMT in 2010, paying on average an additional $3,900 in tax.  Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax.

Tax Returns Affected by the Alternative Minimum Tax (Millions)

For the past four decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax, which was originally intended to impose taxes on high-income individuals who use tax preferences to greatly reduce or eliminate their liability under the regular income tax. The current version of the AMT requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. That second set of rules increases the amount of taxes paid by some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system.

For most of its existence, the AMT has played a minor role in the tax system, accounting for less than 2 percent of individual income tax revenues (or 1 percent of total revenues) and affecting less than 1 percent of taxpayers in any year before 2000. Since then, the tax would have reached more and more taxpayers (because, unlike the parameters of the regular income tax, those of the AMT are not indexed for inflation), but lawmakers have intervened each year to slow that expansion. In addition, a series of reductions in the regular income tax enacted starting in 2001 would have caused even more returns to be subject to the AMT were it not for the series of temporary adjustments that lawmakers made to the alternative tax.

As an increasing number of taxpayers incur liabilities under the AMT, pressures to permanently reduce, eliminate, or otherwise modify the tax are likely to grow. A brief released by CBO today describes the expanding scope of the AMT and the changes in the types of taxpayers affected by the tax, if current law remains unchanged. The brief also discusses three options that illustrate the range of choices policymakers face: indexing the AMT’s parameters for inflation; allowing additional exemptions and deductions under the AMT; and eliminating the AMT. Each of those options would involve revenue losses of several hundred billion dollars over the next 10 years relative to receipts projected under current law.

This brief was prepared by Joshua Shakin of CBO’s Tax Analysis Division.

The number of jobs in the United States has declined almost every month since December 2007. Although nearly all professional forecasters believe that the economy has begun to recover from the recent recession, many also predict that the pace of the recovery will be slow and that unemployment will remain high for several years. Concerns that the economic recovery will be protracted have prompted the consideration of further fiscal policy actions beyond those actions taken over the last year. In response to a request from the Chairman of the Senate Budget Committee, CBO released a report today that examines the potential role and efficacy of fiscal policy options for increasing economic growth and employment, particularly over the next two years.

CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

In a previous report and testimony, CBO identified three key criteria for judging policy options for spurring economic growth and increasing employment:

• Timing—providing help when it is needed most;
• Cost-effectiveness—providing the most growth and employment per dollar cost to the federal budget; and
• Consistency with long-term fiscal objectives—preventing the short-term deficit increase due to stimulative policy from adding excessively to federal debt in the long run.

Other considerations affecting the design of policy options include uncertainty about a policy’s effectiveness, the distribution of benefits among different people, and the value of additional goods and services that would be produced.

CBO examined the effects on output and on employment of a number of policies. The effect of a policy on employment is measured by the cumulative effect on years of full-time-equivalent employment for each dollar of total budgetary cost (a year of full-time-equivalent employment is 40 hours of employment per week for one year). By focusing on full-time equivalents, the calculations include increases in hours among people in part-time employment and possibly some overtime for full-time employees.

To account for uncertainty, the analysis includes both a “low” estimate and a “high” estimate for the effect of each policy. For the range of policy options considered, the figure below shows the range of low to high estimates of the cumulative effects on employment in 2010 and 2011, when CBO expects that the economy will still be in the early stages of the recovery.

Cumulative Effects of Policy Options on Employment in 2010 and 2011,
Range of Low to High Estimates 

This paper was prepared by Susan Yang of CBO’s Macroeconomic Analysis Division. Mark Lasky and Ben Page contributed significantly to the analysis and calculated the economic effects of the policies.

After the U.S. government assumed control of Fannie Mae and Freddie Mac—two federally chartered institutions that provide credit guarantees for almost half of the outstanding mortgages in the United States—CBO concluded that the institutions had effectively become government entities whose operations should be included in the federal budget. In contrast, the Administration, which ultimately determines what is included in the budget, considers Fannie Mae and Freddie Mac to be nongovernmental entities for federal budgeting purposes. Because of the differing budgetary treatments, CBO’s and the Administration’s budget estimates related to the entities were quite different for 2009 and over the 2010-2019 period. A background paper released today describes CBO’s budgetary treatment of Fannie Mae and Freddie Mac and the methods CBO used to estimate their costs.

Despite having a unique legal status and a long history linking them to the federal government, Fannie Mae and Freddie Mac have been considered private firms owned by their shareholders. However, with the entities facing substantial losses that threatened their solvency, the government took control of Fannie Mae and Freddie Mac through its authority under the Housing and Economic Recovery Act of 2008 (HERA). The federal government now exercises an extraordinary degree of management and financial responsibility over them. CBO believes—consistent with the principles outlined in the 1967 Report of the President’s Commission on Budget Concepts—that it is appropriate and useful to policymakers to account for and display the entities’ financial transactions alongside other federal activities.

CBO’s Approach

In the baseline budget projections it published in 2009, CBO accounted for the cost of the entities’ operations in the federal budget as if they were being conducted by a federal agency. That is, CBO treated the mortgages owned or guaranteed by Fannie Mae and Freddie Mac as loans and loan guarantees of the federal government. The operations of Fannie Mae and Freddie Mac added $291 billion to CBO’s August baseline estimate of federal outlays for fiscal year 2009 and $99 billion to the spending projected for the 2010–2019 period.

The estimated outlays for Fannie Mae and Freddie Mac represent the subsidy cost (in other words, the long-term cost to the federal government) of those entities transactions. CBO estimated that cost by projecting the net cash flows associated with the two entities’ mortgage commitments and converting those estimates into present values using risk-adjusted discount rates. (The discount rates reflect the expected rate of return that the government could earn on investments or securities of comparable risk.) That procedure is conceptually equivalent to the methods that private companies use to compute the fair value of certain assets and liabilities under generally accepted accounting principles.

The large 2009 figure reflects the recognition of substantial losses on the approximately $5 trillion in mortgages held or guaranteed by the entities at that time. Following the housing bust that began in 2007, Fannie Mae and Freddie Mac experienced unprecedented portfolio losses stemming largely from their holdings of risky private securities, such as securities backed by subprime and Alt-A mortgages that had historically high default rates. CBO’s $291 billion figure closely corresponds to the entities’ own estimates of the deterioration of their net worth when valued at market prices—from a surplus of $7 billion in June 2008 for the two entities combined to a deficit of $258 billion in June 2009. The estimated subsidy costs for the 2010-2019 period represent the projected costs of the entities’ new loan and guarantee commitments during that period.

Because of their federal backing, Fannie Mae and Freddie Mac provide capital and guarantees to the mortgage market at lower prices than private financial institutions can offer, which ultimately transfers risk from the two entities to taxpayers. The subsidy recorded for the entities’ mortgage commitments captures the value of that federal backing.

The Administration’s Approach

The Administration has taken a different approach to recording the impact of Fannie Mae and Freddie Mac on the federal budget. Following the enactment of HERA, the Treasury signed agreements with the two entities intended to ensure that they could continue to support the mortgage market. In exchange for making direct cash infusions into the entities, the Treasury received shares of their preferred stock and warrants to purchase their common stock. The Administration’s Office of Management and Budget (OMB) continues to treat Fannie Mae and Freddie Mac as outside the budget, and it records and projects outlays equal to the amount of those cash infusions. As a result, the Administration has not included in its budget figures subsidy costs that would be directly comparable to CBO’s $291 billion estimate of subsidy costs in 2009. Instead, because the Treasury provided a total of $95.6 billion in cash outlays to the two entities in fiscal year 2009, the government’s final report of spend¬ing for 2009 included that amount, which is similar to CBO’s August 2009 estimate of cash infusions for that year ($112 billion). OMB has estimated that cash outlays from the Treasury to the two entities will total another $65 billion over the 2010–2019 period.

This background paper was prepared by Damien Moore of CBO’s Macroeconomic Analysis Division.

The federal budget deficit was about $390 billion in the first quarter of fiscal year 2010, CBO estimates in its latest Monthly Budget Review—$56 billion more than for the same period in fiscal year 2009 despite reduced spending related to turmoil in the financial markets. Outlays were slightly lower than they were last year at this time, but revenues have fallen by about 11 percent. Later this month, CBO will issue new budget projections for 2010 and the following 10 years.

December 2009 marks the second consecutive December that the federal budget will record a deficit, CBO estimates.  Typically, December yields a budget surplus because most corporations make quarterly income tax payments and withholding for individuals is relatively high because of year-end bonuses and seasonal employment. The deficit in December was $92 billion, CBO estimates, about $40 billion more than the deficit recorded in December 2008. Adjusted to eliminate variation attributable to shifts in the timing of certain payments, the deficit was about $11 billion greater than it was the same month last year.

Outlays

Spending in the first quarter was slightly less this year than it was last year, but after adjustments for shifts in the timing of certain payments, the decline was greater—about $32 billion (or 4 percent). Spending for the Troubled Asset Relief Program decreased by $85 billion, and net spending by the Federal Deposit Insurance Corporation (FDIC) was $45 billion lower because of greater net receipts. (In order to replenish the Deposit Insurance Fund, the FDIC required banks and thrift institutions to prepay insurance premiums that would otherwise be due over the next three years.) Without the timing shifts and the large reductions in spending in those two areas, first quarter spending would be up by $98 billion (or 13 percent) compared with outlays a year ago.

Spending for unemployment benefits more than doubled from the first quarter last year, rising by $22 billion, because of high unemployment and extensions in the duration of benefits. Medicaid spending in the first quarter was up $14 billion (or 25 percent), nearly $10 billion of which is attributable to a provision in the economic stimulus legislation that temporarily increased federal payments to states under Medicaid. Spending for other stimulus programs also contributed to increased spending in December. In addition, adjusted for timing shifts, Social Security benefits were up by $16 billion (or 10 percent) and Medicare spending was up by $8 billion (or 8 percent).

Revenues

CBO estimates that, in the first quarter of the fiscal year, revenues were about $59 billion (or 11 percent) lower than receipts in the same period a year ago. Individual income and payroll taxes combined fell by about $53 billion (or 12 percent): Withholding was $40 billion (or 9 percent) lower, refunds were $10 billion higher, and nonwithheld receipts were $3 billion (or 11 percent) lower. The weakness in withholding stems from the effects of recent legislation and weakness in wages and salaries.

Net corporate income taxes declined by about $15 billion (or 30 percent) compared with receipts during the same period last year because of a combination of higher refunds and lower payments of estimated taxes. The decline in net corporate receipts can be attributed to weak corporate profits and the effects of recent legislation that extended the period over which corporations could apply current-year losses to offset income in previous years.