OVERVIEW OF REVENUE ESTIMATING PROCEDURES AND 

METHODOLOGIES USED BY THE STAFF OF THE 

JOINT COMMITTEE ON TAXATION 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

February 2, 2005 

JCX-1-05 
ii

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

EXECUTIVE SUMMARY ............................................................................................................ 2 

I. OVERVIEW OF REVENUE ESTIMATING RESPONSIBILITIES......................................... 6 

II. REQUIREMENTS, CONSTRAINTS, AND CONVENTIONS OF THE REVENUE 

ESTIMATING PROCESS.............................................................................................................. 9 

A. Background on Revenue Estimating and Budget Act Requirements ................................. 9 

1. Estimating mechanics ..................................................................................................... 9 

2. Estimating checks and balances.................................................................................... 10 

3. Tax expenditures........................................................................................................... 11 

B. The Budget Window and Presentation of Estimates......................................................... 12 

1. The budget window....................................................................................................... 12 

2. Presentation of estimates............................................................................................... 13 

C. Offsets in Revenue Estimates ........................................................................................... 14 

1. The income and payroll tax offset to changes in excise tax revenues .......................... 14 

2. The income and payroll tax offset to changes in payroll tax revenues......................... 15 

3. Indirect tax effects......................................................................................................... 15 

III. ESTIMATING PROCEDURES AND MODELS.................................................................. 18 

A. Behavioral Effects............................................................................................................. 18 

B. Compliance, Administration and Enforcement................................................................. 20 

C. Distributional Analysis ..................................................................................................... 22 

D. Tax Models and Updates .................................................................................................. 30 

1. The individual model .................................................................................................... 30 

2. The corporate model ..................................................................................................... 32 

3. The estate and gift model.............................................................................................. 32 

4. Individual panel models................................................................................................ 33 

E. Technical Corrections ....................................................................................................... 34 
1

INTRODUCTION 

This document,1

 prepared by the staff of the Joint Committee on Taxation (“Joint 

Committee staff”), provides an overview of the current procedures used in the revenue 

estimating process. The emphasis is solely on methodology and issues associated with the 

preparation of conventional revenue estimates.2

 Part I provides an overview of the revenue 

estimating responsibilities of the Joint Committee staff. Part II discusses requirements, 

constraints, and conventions of the revenue estimating process. Part III presents estimating 

procedures and models. 

 

1

 This document may be cited as follows: Joint Committee on Taxation, Overview of Revenue 

Estimating Procedures and Methodologies Used by the Staff of the Joint Committee on Taxation, 

(JCX-1-05), February 2, 2005. 

2

 See Joint Committee on Taxation, Overview of Work of the Staff of the Joint Committee on 

Taxation to Model the Macroeconomic Effects of Proposed Tax Legislation to Comply with House Rule 

X111.3.(h)(2), (JCX-105-03), December 22, 2003, for a discussion of how the Joint Committee staff 

provides supplemental macroeconomic analysis of certain tax proposals. 
2

EXECUTIVE SUMMARY 

Introduction

This document provides an overview of the current procedures used in the revenue 

estimating process. The emphasis is solely on methodology and issues associated with the 

preparation of conventional revenue estimates of proposed changes to the Internal Revenue 

Code. The report provides a summary of the revenue estimating responsibilities of the Joint 

Committee staff; discusses requirements, constraints, and conventions of the revenue estimating 

process; and presents the estimating procedures and models used by the Joint Committee staff in 

preparing revenue estimates. This summary provides a brief discussion of the principal topics 

covered in the report. 

Overview of Revenue Estimating Responsibilities

The Joint Committee staff is nonpartisan and serves the entire Congress. The 

Congressional Budget Act of 1974 (“the Budget Act”), as amended, stipulates that revenue 

estimates provided by the Joint Committee staff will be the official estimates for all tax 

legislation considered by the Congress. The objective of the estimating process is to produce 

accurate, consistent, fair, and impartial estimates that can be relied upon by Members of 

Congress in making legislative decisions. 

Any Member of Congress may request a revenue estimate for a tax proposal. There has 

been a significant growth in requests over time. In 1986, the Joint Committee staff received 474 

requests. By 2004, this figure had increased to 3,580. The largest number of requests to date, 

4,839, was received in 2003. While the majority of requests are for revenue estimates, the Joint 

Committee staff also receives requests for distributional, legal, and data analyses. All requests 

are treated as confidential. Generally, a response to a request is released only to the Member 

making the request and the response remains confidential unless the Member decides to make the 

information public. Confidentiality allows the Joint Committee staff to maintain its nonpartisan 

role in the legislative process. 

When a revenue estimate has been included in a publicly available document (e.g., a 

revenue table summarizing a markup proposal or the result of a reported bill), the estimate is 

posted to the Joint Committee website. An estimate is also publicly released in circumstances 

where the information is of widespread and immediate interest by the Members of Congress 

(e.g., a tax bill about to be voted upon by the full House or the full Senate). 

Background on Revenue Estimating and Budget Act Requirements

The starting point for a revenue estimate prepared by the Joint Committee staff is the 

Congressional Budget Office (“CBO”) 10-year projection of Federal receipts, referred to as the 

“revenue baseline.” The revenue baseline serves as the benchmark for measuring the effects of 

proposed tax law changes. The baseline assumes that present law remains unchanged during the 

10-year budget period. Thus, the revenue baseline is an estimate of the Federal revenues that 

will be collected over the next 10 years in the absence of statutory changes. The Joint 

Committee staff is required to use the CBO revenue baseline in their revenue estimates. 
3

In providing conventional estimates, the Joint Committee staff assumes that a proposal 

will not change total income and therefore holds Gross National Product (“GNP”) fixed. The use 

of fixed economic assumptions does not prevent the Joint Committee staff from taking into 

account possible shifts in economic activity across sectors or markets and/or changes in the 

timing of such activity in response to the proposed tax change, so long as GNP remains 

unaffected. 

The Joint Committee staff uses confidential tax return information to prepare revenue 

estimates. The Statistics of Income Division (“SOI”) of the IRS provides large micro-level data 

sets consisting of carefully sampled and edited tax returns. SOI data provides the primary 

building block for revenue estimates. In the process of estimating a proposal, other information 

sources are used frequently. These sources include other government data, survey data, 

constituent data, and third-party data. 

The Budget Window and Presentation of Estimates

The Joint Committee staff is required by the budget resolutions to present revenue 

estimates as point estimates (that is, present one dollar figure rather than a range of possibilities) 

calculated in nominal dollars. The current budget process also requires the Joint Committee staff 

to generate revenue estimates of tax legislative proposals over a 10-year period, often referred to 

as the “budget window.” Revenue estimates for each year within the budget window are fiscal 

year estimates. The budget resolutions require revenue estimates to be expressed in nominal 

dollars over a fixed period. 

Behavioral Effects in Revenue Estimates

Although conventional revenue estimates are sometimes referred to as “static,” for more 

than a quarter of a century, Joint Committee staff revenue estimates have taken into account 

taxpayers’ likely behavioral responses to proposed changes in tax law. Behavioral effects can be 

broadly characterized as shifts in the timing of transactions and income recognition, shifts 

between business sectors and entity form, shifts in portfolio holdings, shifts in consumption, and 

tax planning and avoidance strategies. The report briefly presents a few specific examples that 

give a flavor for the issues the Joint Committee staff considers when accounting for behavioral 

effects in revenue estimates. 

Compliance, Administration and Enforcement Costs

The Joint Committee staff attorneys, accountants, and economists working as a team 

examine compliance, administration, and enforcement issues that could affect the timing or 

amounts of revenues collected as part of the process of understanding how a proposal would 

operate. When these issues are likely to be important to a proposal, the Joint Committee staff 

accounts for their effects in the revenue estimate. 

The Joint Committee staff uses a variety of sources to determine how compliance, 

administration, and enforcement issues might affect revenue. IRS compliance studies provide 

information for issues involving individual taxpayers. The Joint Committee staff also uses 

information provided by the IRS about their examination, enforcement, appeal, and litigation 

activities. In some areas, such as tax shelters, the Joint Committee staff is frequently briefed by 
4

IRS personnel. Information provided at these meetings helps the Joint Committee staff gauge 

the likely compliance, administrative, and enforcement effects of particular proposals. 

Indirect Tax Effects

In estimating the revenue effects of proposed changes to tax law, the Joint Committee 

staff incorporates the behavioral responses of taxpayers (within the fixed-GNP convention) and 

any indirect tax effects associated with that behavior. These secondary effects are not the direct 

result of tax changes. Instead, they arise from changes in taxable income induced by behavioral 

responses to tax changes. 

Indirect tax effects are not limited to changes in tax law, however. Non-tax legislation, 

either by design or not, may cause changes in taxable income and thereby impact Federal tax 

receipts. The CBO has responsibility for scoring the budget effects of non-tax legislation, and 

over time CBO has developed general guidelines for when indirect tax effects are scored and by 

whom (often in consultation with the Joint Committee staff). Regardless of whether CBO or the 

Joint Committee staff scores the indirect tax effects, to the extent that these effects are accounted 

for they are included with the estimate of the bill. 

Distributional Analysis

Distributional analysis is not a legally required task of the Joint Committee staff. 

However, upon request of Members or committee staff, distributions of certain tax changes are 

provided as background information. The Joint Committee staff has produced distributional 

analyses since the early 1970s. The current distribution methodology dates to 1994. Under this 

method, the Joint Committee staff provides a distribution by current income group, when 

sufficient information is available, for legislation affecting the individual income tax, Social 

Security and Medicare payroll taxes, and excise taxes. The current methodology does not 

distribute corporate income taxes and estate and gift taxes. 

The measure used in the distributional analysis is the change in liability (taxes paid) for 

the taxable year. Liability is measured, whenever possible, after any behavioral response related 

to the tax change. Compliance issues are also taken into account in the measurement of liability. 

The basic unit of analysis is the tax filing unit or return. Changes in tax liability are 

distributed to taxpayers according to their expanded income. This income classifier begins with 

Federal adjusted gross income and adds tax-exempt interest, employer contributions for life and 

health insurance, employer share of Social Security and Medicare payroll tax, workers’ 

compensation, untaxed Social Security benefits, insurance value of Medicare benefits, alternative 

minimum tax preference items, and excluded income of U.S. citizens living abroad. Yearly 

distributions in nominal dollars are provided for the first five years of the 10-year budget 

window. 

Tax Models

The Joint Committee staff uses several highly developed microsimulation tax models to 

estimate the revenue impact of changes in tax laws. These are the Individual Model, the 

Corporate Model, and the Estate and Gift Model. In addition, the staff is beginning to use 
5

individual panel-based models. The primary source of tax data for the models comes from the 

SOI division within the IRS. Some of the models use large micro-data files, while others are 

smaller and spreadsheet based. Some models reside on a desktop computer, while others reside 

on “servers” and are simultaneously available to several staff members. The complexity and 

scope of a model are determined by several factors including the amount and type of data 

available, the level of interest in the model, and the level of complexity associated with the 

questions being asked of the model. 
6

I. OVERVIEW OF REVENUE ESTIMATING RESPONSIBILITIES 

The Joint Committee staff is nonpartisan and serves the entire Congress. Section 201(f) 

of the Congressional Budget Act of 1974 (“the Budget Act”), as amended, stipulates that revenue 

estimates provided by the Joint Committee staff will be the official estimates for all tax 

legislation considered by the Congress. 

Any Member of Congress may request a revenue estimate for a tax proposal. The Joint 

Committee staff asks that these be written requests signed by the requesting Member.3

 The Joint 

Committee staff also answers written requests from ranking staff members of the House Ways 

and Means Committee and the Senate Finance Committee. Although most requests come from 

the Members and staff of these committees, the Joint Committee staff receives and attempts to 

answer as many requests as possible from all Members. Requests are handled on a first-in, firstout basis to the greatest extent possible. However, the Joint Committee staff is forced to make 

adjustments to that policy based on the legislative timetable and committee and floor action. 

Figure 1 shows a graph of the numbers of requests received each year since 1986. The 

graph shows that there has been a significant growth in requests over time. Information from 

previous years, not shown, indicates that a very large portion of this growth comes from 

increased activity from the staffs of the tax-writing committees. Table 1 provides a breakdown 

of requests from various sources for the 2nd Session of the 108th Congress. This attachment also 

shows that over 90 percent of all requests received in 2004 have been closed. Over 75 percent 

were closed through written response. 

While the majority of requests are for revenue estimates, the Joint Committee staff also 

receives requests for distributional, legal, and data analyses. All requests are treated as 

confidential. Generally, a response to a request is released only to the Member making the 

request and the response remains confidential unless the Member decides to make the 

information public. The confidential treatment of Member requests extends to the process of 

developing tax legislation, which may involve substantial consultation between a Member (and 

his or her staff) and the Joint Committee staff. Similarly, any information provided to the Joint 

Committee staff to help in the formulation of a revenue estimate is treated as confidential and is 

not released outside the Joint Committee staff. Confidentiality allows the Joint Committee staff 

to maintain its nonpartisan role in the legislative process. 

When a revenue estimate has been included in a publicly available document (e.g., a 

revenue table summarizing a markup proposal or the result of a reported bill), the estimate is 

posted to the Joint Committee website. An estimate is also publicly released in circumstances 

where the information is of widespread and immediate interest by the Members of Congress 

(e.g., a tax bill about to be voted upon by the full House or the full Senate). 

 3

 The Joint Committee staff makes presentations to new Congressional staff regarding Joint 

Committee services and procedures when time permits. A pamphlet describing Joint Committee services 

is also available (Joint Committee on Taxation, Background Information Relating to the Joint Committee 

on Taxation, JCX-12-00, January 12, 2000). 
7

Figure 1 

The Joint Committee staff uses confidential tax return information to prepare revenue 

estimates as well as to assist understanding of the tax law. Section 6103 of the Internal Revenue 

Code (“the Code”) provides that return and return information are confidential and not to be 

disclosed to anyone except as explicitly authorized in section 6103. Section 6103(f) authorizes 

the Joint Committee staff to receive confidential tax returns and return information from the 

Internal Revenue Service (“IRS”). The Joint Committee staff is not authorized to disclose 

confidential tax return information except in a limited number of circumstances enumerated in 

section 6103(f)(4). These situations arise only when the Joint Committee, the House Ways and 

Means Committee, or the Senate Finance Committee is meeting in closed executive session, or 

when the Chief of Staff of the Joint Committee appoints persons as agents. 

The objective of the estimating process is to produce accurate, consistent, fair, and 

impartial estimates that can be relied upon by Members of Congress in making legislative 

decisions. The Joint Committee staff is dedicated to improving its estimating methodology to 

enhance the accuracy of its work product. 

Twenty-five years ago, the estimating staff of the Joint Committee consisted of only 

seven economists. Currently, the estimating staff includes eighteen economists and two 

statistical analysts. In addition, three computer specialists support both the revenue estimating 

function and the rest of Joint Committee staff work. The Joint Committee staff economists have 

advanced degrees and substantial experience with computer modeling and quantitative methods 

of analysis relating to revenue estimation. As can be seen from Figure 1, the number of revenue 

requests increased by over sevenfold between 1986 and 2004. The estimating staff has doubled 

Joint Committee on Taxation

Revenue Estimate Requests

900

1,461

2,380

2,079

2,729

3,583 3,525

2,807

4,839

4,491

4,150

2,278

1,792

1,259

2,350

1,286

1,290

474 420

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Calendar Year
8

in that time. Despite the increased workload, the Joint Committee staff has been able to maintain 

the quality of its estimates as a result of improved technology and other efficiency gains. 

Table 1 

 

Requests Requests Requests Percent

Requestors Received Pending Closed Closed

Ways & Means Committee

Republicans.......................................................................................... 842 66 776 92.2%

Democrats............................................................................................ 188 19 169 89.9%

Senate Finance Committee

Republicans.......................................................................................... 933 91 842 90.2%

Democrats/Independent....................................................................... 1,162 97 1,065 91.7%

House (Non Ways & Means Committee)

Republicans.......................................................................................... 71 7 64 90.1%

Democrats/Independent....................................................................... 78 10 68 87.2%

Senate (Non Senate Finance Committee)

Republicans.......................................................................................... 81 10 71 87.7%

Democrats............................................................................................ 131 10 121 92.4%

Others.................................................................................................................... 9 94 85 90.4%

TOTAL.................................................................................................................... 319 3,580 3,261 91.1%

Joint Committee on Taxation

[1] Totals include both revenue and non-revenue requests. 

REQUEST DATA RELATING TO THE 2ND SESSION OF THE 108TH CONGRESS [1]

Calendar Year 2004
9

II. REQUIREMENTS, CONSTRAINTS, AND CONVENTIONS 

OF THE REVENUE ESTIMATING PROCESS 

A. Background on Revenue Estimating and Budget Act Requirements 

1. Estimating mechanics 

The starting point for a revenue estimate prepared by the Joint Committee staff is the 

Congressional Budget Office (“CBO”) 10-year projection of Federal receipts, referred to as the 

“revenue baseline.” The revenue baseline serves as the benchmark for measuring the effects of 

proposed tax law changes.4

 The baseline assumes that present law remains unchanged during the 

10-year budget period. Thus, the revenue baseline is an estimate of the Federal revenues that 

will be collected over the next 10 years in the absence of statutory changes. The Joint 

Committee staff is required to use the CBO revenue baseline in their revenue estimates. 

Underlying the baseline revenue forecast is a 10-year forecast of macroeconomic 

conditions, which CBO produces at the beginning of each calendar year, and updates each 

August.5 Revenue estimates produced by the Joint Committee staff generally incorporate as 

underlying assumptions relevant parts of the CBO baseline macroeconomic forecast, including 

total output, investment, inflation and interest rates, and growth rates for specific income flows 

such as corporate profits and wages. The CBO baseline provides the anchor but not the many 

details necessary for analyses of Member requests. For this reason, the Joint Committee staff 

develops most of its own detailed baselines and models.6 In providing conventional estimates, 

the Joint Committee staff assumes that a proposal will not change total income and therefore 

holds Gross National Product (“GNP”) fixed.7 The use of fixed economic assumptions does not 

prevent the Joint Committee staff from taking into account possible shifts in economic activity 

across sectors or markets and/or changes in the timing of such activity in response to the 

proposed tax change, so long as GNP remains unaffected. 

 4

 The revenue baseline is a component of the budget baseline prepared by CBO, which includes 

expenditures as well as receipts. 

5

 Although the CBO issues a mid-year revision of its forecast, the “official” forecast remains the 

one specified in the conference report accompanying the budget resolution and is the one used in revenue 

estimates. Generally that has been the January baseline. 

6

 For example, the CBO provides a baseline for investment in equipment but not for investment 

in transportation equipment. Thus, the Joint Committee staff must develop its own baseline to analyze 

proposals that affect transportation equipment. 

7

 GNP and Gross Domestic Product (“GDP”) are measures of U.S. production. GDP refers to 

production taking place in the United States and, as such, covers the goods and services produced by 

factors of production (labor and property) located in the United States. GNP includes those goods and 

services produced anywhere in the world by factors of production supplied or controlled by U.S. 

residents. 
10

The Statistics of Income Division (“SOI”) of the IRS provides large micro-level data sets 

consisting of carefully sampled and edited tax returns.8 SOI data provides the primary building 

block for revenue estimates. In the process of estimating a proposal, other information sources 

are used frequently. These sources include other government data, survey data, constituent data, 

and third-party data.9

 The tax data and tax models used by the Joint Committee staff are 

discussed in further detail in section III.D. 

Although conventional revenue estimates assume that a proposal will not affect 

macroeconomic projections, the estimates anticipate and take into account the behavioral and 

other microeconomic effects of the proposal. The tax lawyers and accountants on the Joint 

Committee staff help the economists interpret statutory language and provide feedback regarding 

some of the ways in which taxpayers may respond to a particular proposal. 

2. Estimating checks and balances 

There are a number of checks and balances in the revenue estimating process. The Joint 

Committee staff, working as a team, provides internal checks of revenue estimates through a 

formal review process that includes attorneys who work on the relevant topic, both Deputy 

Chiefs of Staff, and the Chief of Staff. The Joint Committee staff uses a computerized document 

management system to keep track of requests, work in progress, the formal review process, and 

the ultimate processing of responses to Members. 

Treasury, CBO, State estimators, academics, and private sector contacts may contribute 

to the dialogue before and after an estimate is provided, subject to confidentiality rules. 

Sometimes a proposal will exist for many years before it becomes law. For example, the 

proposals creating empowerment zones took almost 10 years to be enacted, and thus the 

economists had time to iteratively refine the models used to estimate the evolving proposals. 

Although there is no formal process for the revisiting of estimates over time, each 

economist updates his or her revenue estimating models each year as part of updating 

assumptions to the new CBO baseline. To the extent that additional information has become 

available in that time period, it is incorporated into the updated model. The Joint Committee 

staff often uses this occasion to consult recent academic literature and to research modeling 

issues with colleagues and outside experts. 

Comprehensive retrospective examinations are extremely difficult for a number of 

analytical reasons. One reason is that it is often impossible to tell what revenue collections 

would have occurred in the absence of a specific proposal, as receipts are affected by general 

economic conditions. In addition, estimates that become law are typically enacted as parts of 

large tax bills that contain many interacting provisions. Identifying the impact of a specific 

 8

 The IRS has a wealth of other information relating to the administration and enforcement of the 

tax laws, and the Joint Committee staff draws upon this information as well. 

9

 Data from private sources is potentially valuable to the Joint Committee staff. For some 

proposals, this data provides the only information available. Any data received from outside sources is 

carefully screened before being used in the revenue estimating process. 
11

provision is at best problematic, and often impossible. Revisiting the estimate of an entire tax 

bill, as opposed to individual provisions in the bill, also presents difficulties. Most large 

packages can be expected to result in behavioral effects that have allocative or sectoral 

consequences and may generate macroeconomic effects. Teasing out the portion of the 

economic changes caused by a specific tax law change is a challenging task. While the Joint 

Committee staff does not lack the expertise to engage in such econometric analyses, they require 

a considerable investment of staff time, and the results are always subject to debate. 

3. Tax expenditures 

The Budget Act mandates the Joint Committee staff to transmit annually to the House 

and Senate Budget Committees its estimates of tax expenditures for the next five years. Tax 

expenditures are defined under the Budget Act as “revenue losses attributable to provisions of 

the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income 

or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” Thus, 

tax expenditures include any reductions in income tax liabilities that result from special tax 

provisions or regulations that provide tax benefits to particular taxpayers. 

Tax expenditures are analyzed relative to a concept of “normal income taxation,” which 

generally embodies taxing income as it is accrued, except when measurement of the accrual is 

deemed too difficult to administer (as in the case of unrealized capital gains or unexercised stock 

options). A tax expenditure is measured by the difference between tax liability under present law 

and the tax liability that would result from a re-computation of tax without benefit of the tax 

expenditure provision. Unlike revenue estimates, tax expenditure estimates do not include 

behavioral responses or possible interaction with other incentives. 

Each year the Joint Committee staff updates the tax expenditure list to reflect any 

legislative changes that may have added or removed a tax preference during the year. Estimates 

are, of course, updated to reflect current economic conditions. After transmitting its report to the 

Budget Committees, the Joint Committee staff has traditionally published its list of tax 

expenditure estimates.10

 

 10 The Joint Committee staff first prepared tax expenditure estimates in 1972 (Estimates of 

Federal Tax Expenditures, October 4, 1972) and has published tax expenditure pamphlets annually since 

1975. See, for example, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal 

Years 2005-2009, JCS-1-05, January 12, 2005. 
12

B. The Budget Window and Presentation of Estimates 

1. The budget window 

Impact of the budget window on legislative proposals

The current budget process requires the Joint Committee staff to generate revenue 

estimates of tax legislative proposals over a 10-year period, often referred to as the “budget 

window.”11 Revenue estimates for each year within the budget window are fiscal year estimates. 

The Federal fiscal year covers the period from October 1 to September 30. 

The use of a finite budget window provides proponents of legislation with two strategies 

to reduce the revenue cost of a proposal. A provision may be sunsetted before the end of the 

budget window or conversely may be phased-in gradually over the budget window so that the 

provision becomes fully effective years after the date of enactment or even outside the budget 

window. Under a Budget Act requirement, only sunsets of excise taxes dedicated to trust funds 

are assumed to continue (and not sunset). Revenue estimates prepared by the Joint Committee 

staff reflect the proposed changes in law no matter how unusual the pattern may be. 

The sunsetting of a provision can have behavioral, and therefore revenue, implications 

because taxpayers may have an incentive to modify their behavior in order to have tax-favored 

activity fall within the period of eligibility. A typical response is an acceleration of activity that 

would normally occur after the sunset. The effect of a phase-in is opposite that of a sunset: 

rather than accelerating taxpayer activity, it can delay taxpayer activity. 

Taxpayer expectations also affect the behavioral response to sunset rules. For example, 

although a revenue estimate takes seriously the forthcoming sunsets of a provision, the estimates 

may also assume that taxpayers will view a provision that has a history of being temporarily 

extended as being permanent. In that case, the sunsetting of the provision may result in very 

little or no behavioral changes. 

Present discounted value and nominal versus real

Because the budget resolutions require revenue estimates to be expressed in nominal 

dollars over a fixed period (currently 10 years), the Joint Committee staff does not discount the 

revenue cost of proposals for the time value of money. In general, the effect of discounting 

within the budget window is to lower the revenue effect (either positive or negative). To provide 

a complete estimate of the present discounted value of a proposal that effects tax revenue into the 

future, the Joint Committee staff would be required to project the revenue effect of the proposal 

many years beyond the budget window to fully capture all costs and benefits. Currently, the 

economic forecast provided by CBO, which underlies the Joint Committee staff’s revenue 

estimates, only covers 10 years into the future. An economic forecast well beyond the budget 

window would be a necessary first step to providing estimates in present value terms. Another 

 11 Under the Budget Resolution of 1994, the Senate requires presentation of estimates for each 

year of a 10-year budget period and totals summing (i) the first five-year and (ii) the entire 10-year 

period. The House requires estimates for each year of a five-year budget period. 
13

practical issue is determining the correct discount rate. Even within a 10-year budget window, 

the discounted revenue effect of proposals will vary considerably with the choice of discount 

rate. 

Although the response letters prepared by the Joint Committee staff do not provide 

estimates for revenue effects beyond 10 years, the letters often note that there will be revenue 

effects outside the budget window. 

2. Presentation of estimates 

The actual presentation of revenue estimates within a revenue table or letter to a Member 

of Congress is dictated by certain factors that the Joint Committee staff is required to conform to, 

and others that are subject to Joint Committee staff discretion. For example, the Joint Committee 

staff is required to present revenue estimates as point estimates (that is, present one dollar figure 

rather than a range of possibilities) calculated in nominal dollars. The Joint Committee staff has 

discretion in how to present interaction effects between components of a tax package. To the 

extent that these interaction effects have revenue costs, the consequences can either be 

incorporated into the revenue estimates of the individual proposals or expressed as a separate line 

item on a revenue table. The Joint Committee staff uses both techniques. 
14

C. Offsets in Revenue Estimates 

1. The income and payroll tax offset to changes in excise tax revenues 

Introduction

In estimating the revenue effects of changes in excise taxes, the Joint Committee staff 

(along with staff at CBO and Treasury’s Office of Tax Analysis (“OTA”)) generally assumes 

that the net effect on total Federal tax receipts from an increase in Federal excise taxes is less 

than the increase in gross excise tax receipts. The difference between the change in excise tax 

receipts and the change in total Federal tax receipts is referred to as the “income and payroll tax 

offset.” The difference arises from the fact that an increase (decrease) in excise taxes results in a 

decrease (increase) in income subject to Federal income and payroll taxation. 

There are several channels through which the imposition of an excise tax can affect 

taxable income. If supply of the taxed product is perfectly inelastic, producers of the taxed 

product absorb the entire cost of the tax. While the gross receipts of the producers remain 

unchanged, net receipts after payment of the excise tax fall by the amount of excise tax collected. 

This decline in income for producers of the taxed good will be allocated among profits and 

wages, depending on market forces, and result in a decline in some combination of the payroll 

tax base, and the individual and corporate tax bases. 

If, at the opposite behavioral extreme, demand is perfectly inelastic, consumers pay the 

entire tax. Producers of the taxed good will take in more revenue per unit of sale, but will 

subtract the excise tax as a cost of doing business leaving net revenue per unit sold and thus 

taxable income unchanged. However, if consumers now spend more on their purchases of taxed 

goods, consumer spending on non-taxed goods will fall, thus lowering the taxable income of 

producers of non-taxed goods. As in the previous case, this change in consumption will result in 

some combination of reduced payroll, corporate income, and individual income taxes in the 

affected industries. 

Of course, for most taxed products, it is likely that neither of these two extreme cases 

would occur. Instead, it is expected that the reduction in taxable income due to the imposition of 

an excise tax will come from some combination of reduced taxable income to the taxed and nontaxed goods. 

Measuring the Offset

The existence of the income and payroll tax offset for excise taxes has become an 

established, generally accepted component of revenue estimates for excise taxes. Because the 

incidence assumptions that would have to be made in calculating separate offset factors for each 

type of excise tax would be extremely time-consuming to determine and would, in any event, be 

subject to a substantial degree of uncertainty, revenue estimating staffs have settled on using a 

standard offset factor for most excise tax estimates. This factor may be thought of as an average 
15

marginal tax rate on factors of production. For some years, estimating staffs (Joint Committee 

staff, OTA staff and CBO staff) have applied a 25 percent offset to most excise tax estimates.12

2. The income and payroll tax offset to changes in payroll tax revenues 

In estimating the effects of changes in payroll taxes, the Joint Committee staff generally 

assumes that the net effect on Federal receipts is less than the change in payroll tax receipts. 

Payroll taxes include taxes under the Federal Insurance Contributions Act (“FICA”) and the 

Federal Unemployment Tax Act (“FUTA”). Because these taxes are levied on virtually all 

employees,13 there are no shifting opportunities for avoiding this tax. Consequently, it is 

assumed that payroll taxes are part of the cost of compensation. In addition, it is assumed that 

employees’ compensation is equal to their marginal product of labor, and that their marginal 

product of labor is not affected by changes in payroll tax law. Therefore, any change in payroll 

taxes will be offset by changes in other forms of compensation. While it is possible that this 

reallocation of compensation in response to a change in payroll taxes could occur over several 

years, in the interest of consistency and simplicity of implementation, the offset is applied as if 

the reallocation occurs in the first year of the policy change. 

Using these assumptions, the offset is derived by allocating the change in other 

compensation across taxable and non-taxable compensation proportionately and applying an 

average marginal tax rate on wages to the taxable portion of the reallocation. This computation 

results in an offset of 10 percent of the estimated changes in payroll taxes.14 As with the income 

and payroll tax offset for excise taxes, the payroll tax offset has not been recomputed in recent 

years. 

3. Indirect tax effects 

In estimating the revenue effects of proposed changes to tax law, the Joint Committee 

staff incorporates the behavioral responses of taxpayers (within the fixed-GNP convention) and 

any indirect tax effects associated with that behavior. These secondary effects are not the direct 

result of tax changes. Instead, they arise from changes in taxable income induced by behavioral 

responses to tax changes.15

Indirect tax effects are not limited to changes in tax law, however. Non-tax legislation, 

either by design or not, may cause changes in taxable income and thereby impact Federal tax 

 12 Adjustments are sometimes necessary in the application of the offset to excise taxes that are 

levied on products sold or purchased primarily by non-taxed entities, such as vaccines, for which the 

Federal government is a major purchaser. 

13 There is an exception for FICA taxes for certain employees of State and local governments 

who were hired before April 1, 1986, and continuously employed by State or local governments who 

maintained retirement systems outside the Social Security system, and who were never part of the Social 

Security system. 

14 This is the same offset used by CBO and OTA. 

15 Behavioral responses are discussed in section III.A. 
16

receipts.16 The CBO has responsibility for scoring the budget effects of non-tax legislation, and 

over time CBO has developed general guidelines for when indirect tax effects are scored and by 

whom (often in consultation with the Joint Committee staff). For example, when CBO scored 

President Clinton’s health plan in 1994, they included indirect tax effects. The general argument 

for including these effects was that this major health reform would result in “significant” indirect 

tax effects. Today, in scoring the budget effects of non-tax health legislation, CBO includes 

indirect tax effects if such legislation is reasonably believed to affect health insurance premiums, 

even if the indirect tax effects would not be considered “significant” by some measures.17

Another general guideline for whether or not indirect tax effects are accounted for is 

whether the non-tax legislation appears to be aimed at affecting Federal tax rules or liability. For 

example, because the interest income on most State and local bonds is exempt from Federal 

taxation, legislation that promotes the use of tax-exempt bonds generally will result in a decline 

in taxable income and revenues.18 The Joint Committee staff provides the indirect effects 

associated with non-tax legislation that affects the issuance of tax-exempt bonds. Another 

example of a non-tax provision that would fall under this criterion is a proposed change in the 

priority of Federal tax liability relative to other obligations of the debtor in bankruptcy 

settlements. 

CBO generally incorporates the indirect tax effects of regulatory bills that mandate the 

increased or decreased use of products that receive special tax treatment. For example, under 

current law, businesses are provided with a tax benefit equal to 52 cents per gallon of ethanol 

that is mixed with gasoline. Recent proposed legislation has mandated that oil companies 

increase the amount of ethanol that is blended with gasoline. If the proposal were enacted there 

would be an indirect tax effect equal to the additional ethanol used due to the mandate times the 

tax subsidy rate. CBO scores the indirect tax effects associated with this proposal. 

Regardless of whether CBO or the Joint Committee staff scores the indirect tax effects, to 

the extent that these effects are accounted for they are included with the estimate of the bill. 

CBO currently does not score the indirect effects associated with certain outlays. In theory, any 

outlay could have indirect tax effects by altering the amount of taxable income in the economy. 

For many outlays, such effects would not exist under the general revenue estimating convention 

that nominal GNP remains fixed. However, with respect to outlays that are taxable income, such 

 16 By definition, the tax effects of non-tax legislation are indirect. 

17 For instance, S. 1637 as passed by the Senate in the 108th Congress, includes an extension of 

the Mental Health Parity Act of 1996. In general, the Act required insurance companies to set the same 

annual and lifetime coverage limits for mental illness as for physical illness. The Joint Committee staff 

analysis of this provision was that it would result in increased premiums for employers who provide their 

employees with health insurance and thereby result in an increase in nontaxable fringe benefits. The 

effect of the proposal is to decrease Federal revenues by increasing non-taxable compensation and 

decreasing taxable wages and/or profits. CBO scored the revenue effects associated with this proposal. 

18 Appropriation bills have included fairly specific guidance that grants be used to leverage taxexempt bond financing. As a result, grants would reasonably be expected to result in net new additions to 

the stock of tax-exempt bonds and corresponding decreases in taxable income. 
17

as Social Security and unemployment insurance benefits, the absence of an indirect tax effect 

could lead to some seemingly odd scoring results. For example, if Congress were to provide 

additional weeks of unemployment compensation (“UC”) benefits to individuals in all States 

who exhaust their regular UC benefits, CBO would not include the indirect tax effects in the 

estimated budget cost of such a proposal (the tax effects that result from an increase in taxable 

income in the amount of the extended UC benefits). Thus, if the proposal were to be signed into 

law on one day, and the next day legislation were proposed to exclude such payments from 

taxable income, because CBO had not offset the cost of the proposal with the additional tax 

receipts associated with the inclusion of the extended UC benefits in income, the Joint 

Committee staff would not show a revenue effect for a proposal to exclude these benefits from 

income. However, once CBO updated their baseline to include the tax revenues associated with 

including these benefits in income, the Joint Committee staff would then score any proposal to 

exclude them. 
18

III. ESTIMATING PROCEDURES AND MODELS 

A. Behavioral Effects 

Although conventional revenue estimates are sometimes referred to as “static,” for more 

than a quarter of a century, Joint Committee staff revenue estimates have taken into account 

taxpayers’ likely behavioral responses to proposed changes in tax law. Because such responses 

are constrained by the fixed-macroeconomic convention (fixed GNP), they are sometimes 

referred to as microeconomic behavioral effects. 

Behavioral effects can be broadly characterized as shifts in the timing of transactions and 

income recognition, shifts between business sectors and entity form, shifts in portfolio holdings, 

shifts in consumption, and tax planning and avoidance strategies. This section briefly presents a 

few specific examples that give a flavor for the issues the Joint Committee staff considers when 

accounting for behavioral effects in revenue estimates. 

Probably the most well known example of timing shifts included in revenue estimates is 

the realization rate for capital gains. When estimating the effect of changes to the capital gains 

tax rate (or of other aspects of the tax law that may affect the incentive to realize capital gains), 

the Joint Committee staff assumes that taxpayers will respond by changing the timing of their 

decision to realize capital gains or losses out of their accrued gains or losses. For instance, in 

response to the separate rate structure on capital gains that was enacted in 1997, the Joint 

Committee staff assumed that there would be a relatively large short-term increase in 

realizations, followed by a smaller long-term increase. The revenues resulting from this dynamic 

response in realization behavior roughly offset the loss in revenues that would have resulted from 

applying the rate change to a static forecast of capital gains realizations. The magnitude of the 

response has been a topic of considerable debate. The Joint Committee staff has published some 

of its analysis of this issue.19

Another behavioral response that has received significant attention from public finance 

economists is the response of individuals to changes in marginal tax rates. When estimating the 

effect of changes to marginal tax rates, the Joint Committee staff assumes that taxpayers will 

respond by changing the form, and in some cases the timing, of their income. For example, in 

response to an anticipated tax rate increase, taxpayers may shift some future compensation into 

the current period and take more of their compensation as non-taxable (or deferred-taxable) 

fringe benefits. Taxpayers may shift their portfolios in the direction of less-taxed sources of 

income, such as tax-exempt bonds, and towards activities that result in itemized deductions. At 

the same time, businesses may shift organizational form between C-corporations and SCorporations. 

The Joint Committee staff applies behavioral response measures that are based on the 

empirical estimates available from the extant economics literature and in-house research. 

However, direct application of empirical evidence from the academic literature is often 

problematic. Sometimes there is little consensus in the literature on the size of a behavioral 

 19 Joint Committee on Taxation, Explanation of Methodology Used to Estimate Proposals 

Affecting the Taxation of Income from Capital Gains, JCS-12-90, March 27, 1990. 
19

response. Even where there is some agreement on the magnitude of the response, it is not always 

straightforward to apply published empirical estimates for a number of reasons. The estimates 

are often measured using tax law changes that are of a different scale than the proposals being 

considered by the Joint Committee staff. The elasticities may have been estimated based on 

large tax changes whereas the proposals are small, or vice versa. Further, estimates found in the 

academic literature typically do not distinguish between microeconomic and macroeconomic 

effects. This is problematic given the fixed GNP convention used in Joint Committee staff 

estimates and requires that the staff reinterpret the estimate before it is applied. Finally, 

estimates from the academic literature sometimes apply to more simplified forms of tax policy 

changes than the types of proposals that are actually under consideration by Congress.20 

 20 For more information on how the Joint Committee staff accounts for possible taxpayer 

behavior in preparing revenues estimates see Joint Committee on Taxation, Methodology and Issues in 

the Revenue Estimating Process, JCX-2-95, January 23, 1995. See also pages 4-5 of Joint Committee on 

Taxation, Written Testimony of the Staff of the Joint Committee on Taxation at a Hearing of the 

Subcommittee on Oversight of the House Committee on Ways and Means Concerning Modeling the 

Economic Effects of Changes in Tax Policy, JCX-36-02, May 6, 2002. 
20

B. Compliance, Administration and Enforcement 

The Joint Committee staff attorneys, accountants, and economists working as a team 

examine compliance, administration, and enforcement issues that could affect the timing or 

amount of revenue collected as part of the process of understanding how a proposal would 

operate. When these issues are likely to be important to a proposal, the Joint Committee staff 

accounts for their effects in the revenue estimate. 

Compliance issues are present in a variety of situations. The Joint Committee staff 

considers the types of taxpayers affected by a proposal and whether some types of taxpayers 

(e.g., high-income individuals, low-income individuals, corporations, self-employed, etc.) might 

more easily comply with its requirements than others. Proposals may require taxpayers to 

perform a variety of compliance activities including completing complicated calculations, selfreporting amounts of income, and determining the value of an asset without a specific market 

transaction. The Joint Committee staff investigates the types of information the taxpayer would 

need to comply and the types of errors they may make when attempting to comply. 

The Joint Committee staff considers the clarity of the underlying concepts in a proposal. 

As an example, when different tax rates were applied to interest and dividend income as part of 

the Jobs and Growth Tax Relief Reconciliation Act in 2003, the Joint Committee staff assessed 

how difficult it might be for payors to properly distinguish between each type of income so that 

taxpayers could report them correctly. Because the distinction between interest and dividend 

income amounts did not affect the determination of liability prior to the proposal, and because 

business systems would need to be redesigned to separately track these amounts under the 

proposal, it became important to allow for a period of uncertainty about the reporting of these 

amounts. As a result of the difficulty in complying with this provision, payors of dividends and 

taxpayers were provided a safe-harbor for reporting amounts paid during 2003. This 

significantly affected the revenue estimate. 

Enforcement issues center around the verification of liability (both during and after 

filing) and the collection of assessments. For example, the Joint Committee staff considers the 

types of taxpayers affected by the proposal, how easily these same taxpayers can be identified, 

how quickly the IRS can determine liability, and the level of effort required by the IRS to 

enforce a proposal. Unless evidence would suggest otherwise, enforcement issues are limited to 

the groups of taxpayers directly affected. The effectiveness of the applicable penalty regime and 

the IRS enforcement posture (i.e., whether the IRS routinely waives penalties for a particular 

issue and how frequently they audit an issue) that would be associated with a proposal are also 

taken into account. Particular attention is paid to how a penalty regime would likely affect 

taxpayer behavior and how IRS procedures may accommodate, or negate, the effectiveness of a 

penalty in compelling compliance. To this end, the Joint Committee staff determines how the 

IRS administers existing provisions in the tax code to guide their judgments. The Joint 

Committee staff does not assume that proposed legislation will require the IRS to undertake new 

enforcement actions or result in a reallocation of resources at the IRS. 

Mechanical aspects of proposals may also affect enforcement and are taken into 

consideration in the revenue estimating process. For instance, proposals that allow self-reporting 
21

tend to have lower compliance and more enforcement issues than proposals that require reporting 

by disinterested parties. 

After determining that compliance, administration, or enforcement issues would likely be 

present in a proposal, the Joint Committee staff uses a variety of sources to determine how 

revenue might be affected. The 1988 Taxpayer Compliance Measurement Program (“TCMP”) 

provides information for issues involving individual taxpayers. Although dated, the file still 

contains useful information on a number of compliance issues. While the Code has changed 

significantly since 1988, current compliance and enforcement issues do have analogs to those of 

earlier years. As a result, the rich detail of the 1988 TCMP continues to have utility for the 

analysis of proposals. In addition, the Joint Committee staff regularly use the results from more 

recent compliance studies such as the IRS 2002 compliance study with regard to the Earned 

Income Credit. 

Often the Joint Committee staff uses existing operational information provided by the 

IRS about their examination, appeal, and litigation activities. On occasion, the Joint Committee 

staff will acquire issue-specific enforcement information directly from the IRS.21 In some areas, 

such as tax shelters, the Joint Committee staff is frequently briefed by IRS personnel and 

provided with much confidential information. This information helps the Joint Committee staff 

gauge the likely compliance, administrative, and enforcement effects of particular proposals. 

 

 21 For example, the Joint Committee staff recently acquired information from the IRS Art 

Advisory Panel to better understand proposals that address the valuation of works of art. 
22

C. Distributional Analysis 

Distributional analysis is not a legally required task of the Joint Committee staff. 

However, upon request of Members or committee staff, distributions of certain tax changes are 

provided as background information. The Joint Committee staff has produced distributional 

analyses in various forms since the early 1970s. The current distribution methodology dates to 

1994. Under this method, the Joint Committee staff provides a distribution by current income 

group, when sufficient information is available, for legislation affecting the individual income 

tax, Social Security and Medicare payroll taxes, and excise taxes. Corporate income taxes and 

estate and gift taxes are not distributed.22

The measure used in the distributional analysis is the change in liability (taxes paid) for 

the taxable year. Liability is measured, whenever possible, after any behavioral response related 

to the tax change. Thus, if a cigarette excise tax rate increase were to reduce cigarette 

consumption sufficiently, the distribution analysis may actually show a reduction in liability. In 

addition, liability is measured in nominal amounts over a limited number of years. Although a 

traditional IRA and a Roth IRA are equivalent in terms of the present value of the tax benefit, 

their distribution profiles would be significantly different. Finally, as is the case with revenue 

estimates, the liability measure takes compliance issues into account. 

The basic unit of analysis is the tax filing unit or return. Omitted from the analysis are 

dependent filers and returns with negative income. Changes in tax liability are distributed to 

taxpayers according to their expanded income. This income classifier begins with Federal 

adjusted gross income and adds the following: 

• Tax-exempt interest; 

• Employer contributions for life and health insurance; 

• Employer share of Social Security and Medicare payroll tax; 

• Workers’ compensation; 

• Untaxed Social Security benefits; 

 22 The methodology focuses on who has the legal responsibility to pay a tax. In certain cases, the 

person or entity that is statutorily liable for certain types of tax payment may be able to shift the cost of 

that tax to someone else. For taxes for which the incidence shifting between taxpayers is widely 

accepted, the Joint Committee staff assigns the liability according to that shift. For example, the 

employer share of payroll taxes is assumed to be borne by employees. In certain cases, it may be clear 

that the incidence of a tax does not coincide with the person or entity that remits the payment to the 

Federal government, but there may be substantial uncertainty (or disagreement) as to which taxpayers 

bear the incidence of the tax. For instance, some economic analysis suggests that corporations may in the 

long run be able to shift a portion of the corporate tax burden to their employees. However, there is some 

uncertainty as to the timing and extent of such a shift. For this reason, the Joint Committee staff does not 

distribute the corporate tax. As far as the estate and gift tax is concerned, it is unclear whether the burden 

of this tax lies with the decedent or the decedent’s heirs. In addition, the base file of the Joint Committee 

model does not identify which taxpayers died during the year and who their heirs might have been. As 

with all revenue estimating assumptions and practices not dictated by the budget law, these 

methodologies are subject to review and potential modification with the availability of new data or based 

on additional research.
23

• Insurance value of Medicare benefits (net of Part A Health Insurance tax 

contributions and Part B premiums paid); 

• Alternative minimum tax preference items; and, 

• Excluded income of U.S. citizens living abroad. 

Yearly distributions are provided for the first five years of the 10-year budget window.23 

The dollar amount distributed for each year includes the effects of phase-ins and phase-outs. In 

each year the nominal income breakpoints are adjusted based on the forecasted GDP deflator. 

From time to time the Joint Committee staff has provided distributions by percentiles in addition 

to standard nominal income categories. A sample distribution analysis of a tax reform follows. 

These tables show the distributional effects of the conference agreement for H.R. 1836, the 

Economic Growth and Tax Relief Reconciliation Act of 2001, for calendar years 2001-2006 

(Public Law 107-16). 

The Joint Committee staff publishes tables showing the distribution of tax liability and of 

selected tax expenditures under current law annually in the tax expenditure pamphlet.24 

 23 In 1993, the Joint Committee staff produced distribution tables that presented five-year 

annuitized benefits. Prior to 1993, the Joint Committee staff published one-year fully phased in 

distribution tables. See, for example, Joint Committee on Taxation, Estimated Budget Effects of the 

Revenue Provisions of H.R. 2264 (The Omnibus Budget Reconciliation Act of 1993) As Agreed to by the 

Conferees, JCX-11-93, August 4, 1993. 

24 See, for example, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for 

Fiscal Years 2005-2009, JCS-1-05, January 12, 2005. 
24

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2001 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 75 -1.0 $ 7 0.4 $ 7 0.4 10,000 to $20,000 ........... -2,989 -11.5 26 1.5 23 1.4 20,000 to 30,000 ............. -5,790 -9.4 62 3.5 56 3.3 30,000 to 40,000 ............. -5,674 -6.4 89 5.1 83 4.9 40,000 to 50,000 ............. -5,490 -5.4 102 5.9 97 5.7 50,000 to 75,000 ............. -11,546 -4.5 256 14.6 244 14.4 75,000 to 100,000 ........... -8,488 -3.5 244 13.9 235 13.9 100,000 to 200,000 ......... -10,488 -2.6 408 23.3 397 23.5 200,000 and over............. -6,997 -1.3 555 31.7 548 32.4 Total, All Taxpayers ..... -$57,536 -3.3 $1,748 100.0 $1,690 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. 

(1) Includes provisions affecting the child credit, individual marginal rates a 10-percent bracket, limitation of itemized ded

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductible IRAs, and the 

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers and taxpayers with negative income are exanalysis. Does not include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) pl

attributable to the proposal.
25

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2002 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 75 -1.0 $ 7 0.4 $ 7 0.4 10,000 to $20,000 ........... -3,596 -13.3 27 1.5 23 1.3 20,000 to 30,000 ............. -7,124 -11.3 63 3.4 56 3.2 30,000 to 40,000 ............. -6,849 -7.6 91 4.9 84 4.8 40,000 to 50,000 ............. -6,198 -5.8 106 5.8 100 5.7 50,000 to 75,000 ............. -13,251 -5.0 267 14.5 254 14.4 75,000 to 100,000 ........... -10,227 4.0 255 13.9 245 13.9 100,000 to 200,000 ......... -14,416 -3.3 442 24.1 427 24.3 200,000 and over............. -16,557 -2.9 578 31.5 562 32.0 Total, All Taxpayers ..... -$78,294 -4.3 $1,836 100.0 $1,758 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. (1) Includes provisions affecting the child credit, individual marginal rates, a 10-percent, limitation of itemized deductions

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductible IRAs, and the 

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers and taxpayers with negative income are exanalysis. Does not include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) p

attributable to the proposal. 
26

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2003 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 83 -1.1 $ 8 0.4 $ 8 0.4 10,000 to $20,000 ........... -3,516 -12.9 27 1.4 24 1.3 20,000 to 30,000 ............. -7,135 -11.0 65 3.3 58 3.1 30,000 to 40,000 ............. -6,946 -7.5 93 4.8 86 4.6 40,000 to 50,000 ............. -6,155 -5.7 108 5.6 101 5.5 50,000 to 75,000 ............. -13,554 -4.9 279 14.4 266 14.3 75,000 to 100,000 ........... -10,553 -4.0 265 13.7 255 13.8 100,000 to 200,000 ......... -15,487 -3.2 479 24.8 464 25.1 200,000 and over............. -17,453 -2.9 609 31.5 591 31.9 Total, All Taxpayers ..... -$80,882 -4.2 $1,933 100.0 $1,852 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. 

(1) Includes provisions affecting the child credit, individual marginal rates, a 10-percent bracket, limitation of itemized ded

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductible IRAs, and the 

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers and taxpayers with negative income are exanalysis. Does not include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) pl

attributable to the proposal. 
27

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2004 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 69 -0.9 $ 8 0.4 $ 8 0.4 10,000 to $20,000 ........... -3,429 -12.6 27 1.3 24 1.2 20,000 to 30,000 ............. -7,121 -10.8 66 3.3 59 3.1 30,000 to 40,000 ............. -6,964 -7.3 96 4.7 89 4.6 40,000 to 50,000 ............. -6,320 -5.8 110 5.4 103 5.3 50,000 to 75,000 ............. -15,049 -5.2 288 14.2 273 14.2 75,000 to 100,000 ........... -12,913 -4.6 279 13.8 266 13.8 100,000 to 200,000 ......... -22,095 -4.3 512 25.2 490 25.3 200,000 and over............. -21,671 -3.4 642 31.6 620 32.1 Total, All Taxpayers ..... -$95,630 -4.7 $2,028 100.0 $1,932 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. 

(1) Includes provisions affecting the child credit, individual marginal rates, a 10-percent bracket, limitation of itemized ded

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductible IRAs, and the 

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers with negative income are excluded from th

include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) p

attributable to the proposal. 
28

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2005 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 76 -1.0 $ 8 0.4 $ 8 0.4 10,000 to $20,000 ........... -3,867 -14.0 28 1.3 24 1.2 20,000 to 30,000 ............. -7,937 -11.6 68 3.2 60 3.0 30,000 to 40,000 ............. -7,720 -7.9 98 4.6 90 4.4 40,000 to 50,000 ............. -6,945 -6.2 112 5.3 105 5.2 50,000 to 75,000 ............. -16,630 -5.5 303 14.2 286 14.1 75,000 to 100,000 ........... -14,709 -5.1 287 13.5 273 13.5 100,000 to 200,000 ......... -24,654 -4.5 547 25.7 522 25.8 200,000 and over............. -21,182 -3.1 678 31.9 657 32.4 Total, All Taxpayers ..... -$103,720 -4.9 $2,129 100.0 $2,025 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. 

(1) Includes provisions affecting the child credit, individual marginal rates, a 10-percent bracket, limitation of itemized ded

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductibles IRAs, and th

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers with negative income are excluded from th

include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) p

attributable to the proposal. 
29

DISTRIBUTIONAL EFFECTS OF THE CONFERENCE AGREEMENT FOR H.R. 183

Calendar Year 2006 

E

Change in Federal Taxes 

(3)

Federal Taxes (3)

Under 

Present Law 

Federal Taxes (3) 

Under 

Proposal 

P

Income Category 

(2)

Millions Percent Billions Percent Billions Percent P

Less than $10,000 ........... -$ 76 -0.9 $ 8 0.4 $ 8 0.4 10,000 to $20,000 ........... -3,789 -13.6 28 1.2 24 1.1 20,000 to 30,000 ............. -7,853 -11.4 69 3.1 61 2.9 30,000 to 40,000 ............. -7,839 -7.9 99 4.4 91 4.4 40,000 to 50,000 ............. -7,570 -6.5 116 5.2 108 5.2 50,000 to 75,000 ............. -18,755 -6.0 313 14.0 294 14.0 75,000 to 100,000 ........... -17,212 -5.8 297 13.3 280 13.3 100,000 to 200,000 ......... -30,208 -5.1 588 26.3 558 26.6 200,000 and over............. -44,177 -6.1 719 32.1 675 32.1 Total, All Taxpayers ..... -$137,476 -6.1 $2,238 100.0 $2,100 100.0 

Source: Joint Committee on Taxation Detail may not add to total due to rounding. 

(1) Includes provisions affecting the child credit, individual marginal rates, a 10-percent bracket, limitation of itemized ded

exemption phaseout, the standard deduction, 15-percent bracket and EIC for married couples, deductibles IRAs, and th

(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exem

employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker’s compensation

Security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and [8] exclucitizens living abroad. Categories are measured at 2001 levels. 

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed t

excise taxes (attributed to consumers). Corporate income tax and estate and gift taxes are not included due to uncertainincidence of these taxes. Individuals who are dependents of other taxpayers with negative income are excluded from th

include indirect effects. 

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) p

attributable to the proposal.
30

D. Tax Models and Updates 

The Joint Committee staff uses a wide variety of economic and statistical models to 

estimate the revenue impact of changes in tax laws. The primary source of tax data for the 

models comes from the SOI division within the IRS. However, the Joint Committee staff 

receives data from multiple sources from both government agencies and non-government 

organizations. For example, the staff receives the Survey of Income and Program Participation 

and the Current Population Survey from the Bureau of the Census. An example of a nongovernment source is information on insurance companies compiled by A.M. Best. 

Some of the models use large micro-data files, while others are smaller and spreadsheet 

based. Some models reside on a desktop computer, while others reside on “servers” and are 

simultaneously available to several staff members. The complexity and scope of a model are 

determined by several factors including the amount and type of data available, the level of 

interest in the model, and the level of complexity associated with the questions being asked of 

the model. Ultimately, the complexity of a model resides in the discretion and best judgment of 

the Joint Committee staff. 

The Joint Committee staff uses several highly developed microsimulation tax models. 

These are the Individual Model, the Corporate Model, and the Estate and Gift Model. In 

addition, the staff is beginning to use panel-based models of individual taxpayers. 

1. The individual model 

The largest model used by the Joint Committee staff is the individual model. This model 

is a microsimulation model based on a stratified sample of individual tax returns submitted to the 

IRS. A tax model simulation works by applying the tax laws and parameters to each return on 

the sample to recreate that return’s Federal individual income tax liability for a given year. The 

model calculates regular tax liabilities and alternative minimum tax liabilities when appropriate. 

In addition, the model calculates liabilities from FICA and Self-Employment Contribution Act 

(“SECA”) taxes. The model generally assumes that taxpayers make optimal choices regarding 

such decisions as claiming itemized deductions or claiming credits. Then, by changing rules or 

parameters reflected by a tax proposal, each return’s liability is recalculated. This produces an 

estimated change in liability for that proposal. 

The current version of the individual model is based on the 2001 Individual and Sole 

Proprietorship file produced by SOI. The stratified sample contains approximately 192,000 

individual tax returns that, when weighted, represent the 130.6 million individual tax returns 

filed with the IRS for 2001. 

Each record in the sample contains nearly all of the information from a return’s Form 

1040 and any accompanying forms and schedules. Added to each record are several additional 

data items. The year-of-birth and gender for each taxpayer and dependent is obtained from an 

exact match to data from the Social Security Administration. The staff augments the data with 

exact links to several Information Return types. The most important of these links is to W-2 

Information Returns. In addition to W-2s, the individual model contains Social Security benefits 

received by individuals from an exact link to SSA-1099 and RRB-1099 Information Returns. 
31

Information on IRA accounts is obtained from links to 5498 Information Returns. Links to other 

information return types are possible and are performed when needed. 

The individual model contains, through statistical imputations, several additional pieces 

of information. The tax data is augmented with statistically matched data from the Current 

Population Survey.25 In particular, the statistical match provides data on health insurance 

coverage, income or benefits from non-taxable sources, and other demographic information. In 

addition, the match imputes non-filers to the model.26 Itemized expenses only appear on returns 

that claimed itemized deductions on Schedule A, these expenses are imputed to non-itemizers. 

The staff also imputes expenses for higher education and amounts for IRA contributions that 

would be made under alternative limits. Finally, as explained further below, the data (tax and 

non-tax) is extrapolated to reflect forecasted income and expenses during the budget period 

(currently 2005 to 2015). 

The current individual model is based on data from 2001 individual tax returns. Given 

the amount of time needed to build an individual model, it would not be prudent to build a new 

model each time a new cross-section data file is received. Further, OTA does the direct 

matching of SOI and Social Security databases, as well as other developmental work for a new 

tax model; the Joint Committee staff builds on OTA’s development efforts. It is therefore 

necessary to coordinate choice of model years with OTA.27

The extrapolation process

Typically, the Joint Committee staff receives from the CBO new economic assumptions 

for the upcoming budget period in December of each year. In particular, CBO provides 

forecasted estimates of National Income and Product Account (“NIPA”) variables for each year 

in the budget window, including baseline individual income tax receipts. In addition, CBO 

provides an estimate of positive capital gains (in AGI) and an estimate of total individual Federal 

income tax liability. The Joint Committee staff also obtains demographic estimates from the 

Census Bureau. The Social Security Administration provides estimates of certain items relating 

to FICA and SECA taxes, as well as estimates of Social Security benefits received. 

 25 Tax proposals often require information about the population that is not reported on tax 

returns. For example, to estimate a tax proposal designed to enhance health insurance coverage would 

require information on health insurance currently being purchased or obtained. One common method for 

dealing with this “missing” information is statistical matching. This procedure involves taking records on 

the base data file (e.g., the sample of tax returns) and statistically linking or matching them to records on 

another data file that contains the desired information (e.g., the Current Population Survey). The income 

and demographic information common to both files is used to do the linking. 

26 In general, non-filers are (usually) people with incomes below the filing requirement threshold. 

27 In selecting a model year to serve as the base for the individual models, estimating staffs 

generally try to take into account whether the year is likely to be typical or “atypical” with respect to the 

business cycle. From this perspective, 2001 may not seem to be an ideal year; however, the 2001 SOI file 

contains specially constructed samples for a number of recently enacted tax credit provisions. 
32

The Joint Committee staff takes these assumptions and generates new growth rates and 

targets for key variables on the individual tax model, such as wages in adjusted gross income. 

As a general statement, the extrapolation process is designed to produce a file of tax returns that 

would be expected in a future year. For example, the Joint Committee staff targets the number 

of tax returns by filing status. The Joint Committee staff targets four income items separately by 

income class: wages, dividends, interest, and positive capital gains. Additional income targets 

include total Schedule C income and losses, total Schedule E income and losses, and total Social 

Security and Railroad Retirement income. The Joint Committee staff currently fits the individual 

model to 138 economic and demographic targets. The final targets are consistent with the 

economic forecasts from CBO. By the end of January, the extrapolation process is complete and 

the individual tax model is ready for processing. 

2. The corporate model 

The corporate model is a microsimulation model that derives taxable income, income tax, 

tax credits, and the alternative minimum tax for all corporations. The data is derived from the 

SOI corporate files that include all corporate income tax forms including S corporations, RICs 

and REITS. The sample is a stratified sample statistically derived to represent the overall 

corporate sector when weighted. The sampling rate increases with asset size and reaches 100 

percent for corporations with assets in excess of ten million dollars. The sample size varies from 

year to year from approximately 80,000 in 1988 to over 140,000 in 2001. 

The corporate model is similar in design and structure to the individual model. The 

model simulates the corporate income tax by calculating the current law and proposed law 

corporate tax liabilities across a sample of tax returns. Unlike the individual model, the 

corporate model can be run on either a full cross-section of sampled returns, or on a panel of 

corporate returns for any combination of tax years from the period 1987 to 2001. The panel 

aspect of the model is important for capturing the inter-temporal nature of the corporate income 

tax. For example, the model can capture amounts of net operating losses that are carried forward 

or carried back. 

Many changes that affect corporate taxation also affect other forms of business entities. 

For example, changes in depreciation rules can affect all forms of business. As a result, the 

corporate model is supplemented with a variety of modules and databases. The supplemental 

sources include a depreciation model, a file of partnership returns, and data on sole proprietors 

and farmers. 

3. The estate and gift model 

The estate and gift model consists of an estate tax calculator applied to a sample of estate 

tax returns. The estate tax returns, provided by SOI, represent the population of those returns 

filed in 2001. The returns report on estates of decedents who died during 2000 and 2001. The 

returns are adjusted each year in the budget period to track demographic profiles and wealth 

targets for the expected estate tax filing population. The stratified sample contains 

approximately 10,800 estate tax returns that when weighted represent the approximately 108,000 

estate tax returns filed with the IRS in their 2001 processing year. Each record in the sample 

contains all of the items reported on the estate tax return. 
33

4. Individual panel models 

To facilitate estimating certain inter-temporal aspects of individual tax laws and changes 

to those laws, the Joint Committee staff has a copy of an individual income tax panel model 

developed by OTA and SOI. The model consists of a panel of tax returns from 1987 to 1996. 

The panel started with approximately 88,000 non-dependent returns filed for tax year 1987. SOI 

then tried to capture the individual tax returns, if any, filed by these same taxpayers in 1988 and 

in every subsequent tax year through 1996. SOI has started to build a new panel of individual 

tax returns beginning with the 1999 tax year. The panel is currently being used by the Joint 

Committee staff and contains records through 2001. 
34

E. Technical Corrections 

From time to time enacted tax legislation may not exactly reflect the intent of the 

legislators. When this occurs, legislators may seek a technical correction to fix the statutory 

language. 

The Joint Committee staff defines a technical correction as legislation that is designed to 

correct errors in existing law in order to fully implement the intended policies of previously 

enacted legislation. The principal factor in determining whether a provision is technical is the 

original intent of the underlying legislation. Once it is determined that the existing statute does 

not properly implement legislative intent, and that the proposed change conforms to and does not 

alter the intent, the provision is deemed to be technical.28

The Joint Committee staff does not provide estimates of the revenue effect of technical 

corrections. This convention stems from the view that the original revenue estimate reflects the 

intent of the legislation. Therefore, an estimate of the correcting provision would be a double 

counting of the effect of the original policy. Technical corrections occurring many years after 

the enactment of the original legislation receive the same treatment as technical corrections for 

recent legislation. 

While the Joint Committee staff does not estimate the effect of technical corrections for 

the purposes of the legislative process, it recognizes that the persistence of an uncorrected error 

will cause actual receipts to deviate from that which would have been predicted given the 

original intent. The correction for this deviation should be properly reflected in the projections 

of the annual budget baseline. Subsequent enactment of the technical correction would then 

result in an opposite movement in the budget baseline. 

 28 It is not relevant to the determination whether the underlying error is one of commission or 

omission or whether it is substantive or merely clerical. The determination involves the House Ways and 

Means Committee and Senate Finance Committee tax staffs, the Joint Committee staff, and the Treasury 

staff. The IRS staff may also be involved. A simple example of a technical error occurs when the 

enacted statutory language is in conflict with both the markup document used in committee deliberation 

and with the committee or conference report that accompanied the passage of the bill.