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1 A GUIDE TO INTERPRETING THE DYNAMIC 

ELEMENTS OF REVENUE ESTIMATES 

Howard W. Nester 

I. INTRODUCfiON 

Over the three year period J 984 through 1986 the Department of the 

Treasury's Office of Tax Analysis (OTA) was responsible for analyzing several 

broad approaches to refonning the Internal Revenue Code and countless proposals to enact changes to specific provisions. One of the outputs of the process was a series of revenue estimates associated with each proposal or group 

of proposals. Summaries of the revenue estimates were published in both of 

the Department of the Treasury's tax refonn volumes, Tax Refonn for Fairness, 

Simplicity, and Economic Growth ("Treasury I")1 and The President's Tax Proposals to the Congress for Fairness, Growth , and Simplicity ("Treasury II"). 

2 

The Administration's summary estimates of the enacted tax refonn bill were 

released in the Administration's Fiscal Year 1988 budget (a more detailed 

version is included as an appendix to this parer). 3 Similar estimates were 

released by the Joint Committee on Taxation. This paper is intended as a 

guide for those seeking a better understanding of how to accurately portray 

and interpret these and similar revenue estimates. It outlines the major 

principles and assumptions that go into such estimates. It also responds to 

criticisms about the "static" nature of revenue estimates by presenting 

examples of several major tax refonn provisions for which behavioral responses 

were a significant consideration in making the estimates. 5 

In Section II the overall approach to making revenue estimates is 

described. Major assumptions underlying revenue estimates are discussed in 

Section III. Issues in fonnatting and presenting a table of reven·ue estimates 

and in interpreting the resulting totals are discussed in Section JV. 

Tire author wishes to thank Iris associates 011 the Revenue Estimating staff. Alexander Basso. 

Edith Brasharl!s, Sonia Conly. George Plesko. and David Weinu for rlreir assistance 011 !Iris 

paper. Till! allflror also wishes to thank Dolores Per1icari for her pali£'111 and skilled 

secretarial help. 

13 
14 Howard W. Nester 

Section V includes examples of major behavioral responses included in revenue 

estimates. Section VI comments on the accuracy of the methodology and 

assumptions used by OTA and Section VII summarizes. 

II. OVERALL DESCRIPTION OF REVENUE ESTIMATES 

The Office of Tax Analysis (OTA) has primary responsibility for producing 

forecasts of unified budget receipts for inclusion in the Administrations' 

budget submissions and internal reviews and for estimating the effect on 

collections of enacted or proposed changes in tax laws. These estimates 

generally include projections of receipts under current law and/or proposed 

law for the next five years. To the fullest extent possible, the Department's 

estimates are based on the Administration's economic forecast. This forecast, 

which consists of an integrated set of GNP accounts and other subsidiary 

economic series, is circulated to all Executive Department agencies for use in 

preparing receipt and outlay estimates for each major budget exercise. 6 This 

serves to ensure consistency across all estimates and as a check on overall 

magnitudes; it also ensures that all of the pieces "add up" and that aggregate 

income is consistent with aggregate demand, including government purchases. 

For each budget exercise. forecasts of receipts by source (e.g., individual 

income taxes, corporate income taxes, deposits by the Federal Reserve system, 

etc.) are generally based on models comprised of time series regression . 

equations used to forecast aggregate tax liability. fonn of payment (such as 

withheld taxes, estimated taxes, and additional taxes paid as a result of 

audits), and the relationship between form of payment and the actual timing of 

collections. 

As a result of the frequent modification of tax laws since 1975, the basic 

approach used in receipts estimating is to forecast "constant law" tax liabilities and add on separate estimates of the impact of changes since the base 

year. These separate (revenue) estimates are generally those derived at the 

time the tax bills were under consideration. modified as necessary for changes 

in economic conditions and additional information since the initial estimates 

were made. 

Each revenue estimate consists of a series of summary statistics indicating 

the expected change in calendar year liability and/or fiscal year tax collections as a result of enacted or proposed changes in tax law. 

Ideally each revenue estimate is based on: 

o A forecast of economic activity directly relevant to the proposal 

(e.g .. investment by businesses in plant and equipment to estimate the 

effect of changes in depreciation rules): 

o A set of tax rules governing the recording of the transactions for 

purposes of measuring taxable income; 

o The applicable marginal tax rates: and. 

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Interpreting the Dynamic Elements of Revenue Estimating 15 

o A set of rules for making tax payments and a forecast of taxpayer 

response to these rules. 

In general, revenue estimates associated with changes in tax law are 

generated using micro-simulation models of actual tax returns, recaHbrated to 

reflect the aggregate economic forecast. The principle micro level models are 

the Individual Tax Model and the Corporate Tax Model. Examples of other 

models used by the Office of Tax Analysis include a depreciation model (see 

Gerardi, et al. , this volume), banking tax model (see Neubig and Sullivan, 

this volume), and an insurance company tax model. 

III. ASSUMPTIONS AND GUIDELINES UNDERLYING 

REVENUE ESTIMATES 

A. Proposals Developed in Conjunction with the 

Administrations' Budget -

Consistency With the Economic Forecast 

The Administration's economic forecast is used, to the fullest extent 

possible, to forecast the relevant economic activity. This not only ensures 

consistency across estimates, it also serves as the way in which second-order 

effects are taken into account in estimates for budget purposes. That is. in 

those instances where tax policy initiatives included in the budget are held 

to have measurable effects on aggregate economic activity. those effects are 

built into the final forecast. The process by which this is accomplished is 

an iterative one in which Treasury first makes estimates of a proposal using a 

base forecast and then transmits the results to the Council of Economic 

Advisors who, in tum. use the results as inputs to rerun the overall forecast. Treasury then uses the next forecast as a revised input for the revenue 

estimate. During preparation of the President's annual budgets two or three 

interactions of this sort are all that are necessary to approximate a simultaneous macroeconomic model solution. 

B. Assumptions When New Proposals Are Estimated 

Estimates of proposals not developed as part of a comprehensive budget 

process are based on the most recent Administration forecast, in which the 

major elements of the forecast remain unchanged. The working assumption is 

that, over the five-year budget horizon. the aggregate production of goods and 

services-and associated incomes from current production-are detennined by real 

variables interacting with the Administration's fiscal policy decisions. 

However, it is specifically recognized that although aggregate levels may be 

relatively fixed . the composition of the variables underlying the totals will 

change much more quickly. To the extent possible. revenue estimates take 
16 Howard W. Nester 

these compositional shifts into account. The foUowing section lists some of 

the economic variables in the forecast that are held constant, those that may 

change depending in the proposal and those-not explicitly part of the forecast-that may also be changed. 

Items Held Constant. Specific elements of the economic forecast that are 

generally held constant across all revenue estimates include: 

o Total GNP; 

o Interest rates; 

o Total employee compensation arising in the production of goods and 

services (wages, salaries, and supplements); 

o Total gross private domestic investment; 

o Overall price index; and 

o Total level of state and local taxes. 

Items That May Change. Examples of elements of the economic forecast that 

are changed as appropriate include: 

o The composition and level of nonwage personal income (proprietors' 

income, rental income, dividend income, and interest income); 

o The mix of employee compensation; 0 The mix of state and local tax revenues; 

o The mix of gross private domestic investment between equipment and 

structures; and 

o Distribution of income between corporate and noncorporate fonns of 

business. 

Items Not Part of the Forecast. Other economic variables that are not 

specifically pan of the economic forecast that are taken into account in 

revenue estimates include (examples can be found in Part IV): 

o Changes in holdings of financial assets; 

o Changes in activity not includable in the GNP accounts (taxable 

activities that are not a result of the production of goods and 

services); and 

o Accounting changes in the recording of transactions for tax purposes. 

C. Other Assumptions 

Several other assumptions underlying revenue estimates should be noted: 

1 . Compliance and Enforcement 

In general, overall levels of compliance and enforcement are held constant 

from those implicit in base line receipts estimates. Proposed changes in tax 

law are assumed to be accompanied by the resources necessary to ensure their 

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Interpreting the Dynamic Elements of Revenue Estimating 17 

effectiveness. This is generally assumed to be accomplished by reallocation 

of existing resources. Of course, estimates are made for specific proposals, 

such as increasing the number of IRS personnel or additional reponing 

requirements. which are directly intended to increase audit coverage and/or 

taxpayer compliance over the historic norm. Estimates of these and similar 

proposals wiJI include estimates of the direct effect of the proposal on tax 

collections and, to a much more limited extent, additional revenues associated 

with some taxpayer compliance response to the proposal. 

A major exception to the general practice in this area was made in the case 

of the estimates of the tax reform bill: the large reduction in individual 

tax rates is projected to have a positive net effect on overall individual 

compliance levels despite the base broadening and tax-shelter provisions of 

the tax reform bill (which have the opposite effect since they raise tax 

payments by individuals utilizing such preferences). (See Item V.K. in the 

tax reform summary table in the Appendix). 

2. Payroll Taxes 

Although tax base broadening proposals may also increase the tax 'base for 

determining payroll (OASDHI) taxes. revenue estimate tables generally exclude 

changes in payroll tax revenues under the assumption that OASDHI rates will be 

set in the future to offset changes in the payroll tax base (in effect 

assuming that there is a target revenue level that the trustees have set). An 

exception is made for proposals which purposely alter the tax rate or base 

(the assumption is that such proposals are aimed at altering the target trust 

fund balances). 

3. Taxpayer Options 

In many instances the Tax Code allows taxpayers options in accounting for a 

transaction and for satisfying payment requirements. Revenue estimates will 

generally reflect past taxpayer practice even though that practice does not 

appear to minimize current tax payments. For example. collections data 

indicate that many individual taxpayers deliberately chose to be overwithheld 

or to overpay estimated taxes despite the existence of options and safe-harbor 

rules which would permit lower payments. This pattern is reflected in revenue 

estimates. 

However, where there are no data to indicate otherwise, OTA generally 

assumes that taxpayers maximize their after-tax income, even though taxpayerspecific conditions may exist such that a taxpayer would choose an alternative 

option over the revenue horizon. For practical purposes tax-minimizing 

behavior is assumed to consist of accelerating deductions and delaying recognition of taxable income to the fullest extent possible. For example. a 

taxpayer may have an option to deduct or to capitalize a given expenditure. 

Absent other information, the revenue estimate is made assuming that the 

taxpayer will fully deduct the expenditure in the earliest period possible. 
18 Howard W. Nester 

4. Pre-Enactment Effects 

One problem that occurs in assessing the impact of a tax proposal is the 

issue of how to account for pre-enactment effects. Taxpayers, of course, 

react in anticipation of changes in tax laws and these reactions affect tax 

deposits. These effects remain no matter what ultimately happens to the law. 

For example, there is evidence that taxpayers accelerated their payments of 

estimated taxes and audit taxes from future years into FY 1986 to avoid 

possible underpayment penalties and to stop accrual of potentially 

nondeductible interest. Another example is the accelerated purchase of 

business equipment in 1985 in anticipation of the repeal of the investment tax 

credit widely speculated to occur on January l, 1 986 (which the new law 

eventually did). These effects are reflected in both recent GNP totals and in 

collections data, and they become part of budget receipts equations. As a 

result, these effects are generally incorporated in the base budget receipts 

forecast and are not included in a revenue estimate table. 

5. Post-Enactment Effects 

Revenue estimates assume continuation of tax law as enacted (or as proposed) and, in keeping with the economic forecast, do not include assumptions 

as to taxpayers' anticipations of the course of future tax policy. For 

example, termination of a tax credit for a tax-favored economic activity might 

be expected to generate accelerated (additional) expenditures in the year or 

two prior to expiration. This behavioral response would be taken into 

consideration in making an estimate of the net cost of the credit. Alternatively one might argue that taxpayers fully anticipate continuation of a 

popular credit and no such "bunching" prior to expiration would occur. This 

anticipation is not included as part of a revenue estimate. 

Capital gains estimates are another example. If realizations are a 

function of, among other things. taxpayers' anticipations as to the course of 

future tax rates, then the levels of realizations will change over the course 

of the year as expectations change. Again , revenue estimates take the tax 

system implicit in the initial Administration forecast as the one that actually is in effect over the budget period. It is therefore, by implication and 

for all practical purposes. also the one that taxpayers would be expected to 

anticipate as each year progresses. 

6. Other Tax-favored Activities 

Revenue estimates will reflect any anticipated shifting of income and/or 

deductions towards alternative known tax-favored activity. For example. 

revenue estimates of eliminating one form of tax-deferred personal income 

payments will include offsets due to shifting to other remaining deferral 

devices. However. revenue estimates do not assume the creation and use of 

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Interpreting the Dynamic Elements of Revenue Estimating 19 

new. as yet unknown. "shelters". In the absence of clear alternatives, any 

shift in the tax base as a result of tax law changes is assumed to be from or 

to fully-taxable activity. 

IV. ISSUES IN FORMATTING AND INTERPRETING A TABLE OF 

REVENUE ESTIMATES 

Before discussing some of the specific areas where behavioral assumptions 

played a significant role in estimating the revenue effects of tax reform, it 

is useful to note problems associated with producing and interpreting a table 

that contains more than one revenue estimate, such as the one for the Tax 

Reform Act of 1986 in the Appendix. Users of revenue estimates will frequently misinterpret the meaning of revenues attributed to specific provisions 

and. as a result. assume that the estimate excludes components they believe 

should be included (or vice versa). 

Stacking Order Issues. The most difficult issue facing the creator of a 

table of revenue estimates is the determination of the level of aggregation 

and the "stacking order" that is used to present results to the user. There 

are three main possibilities for presenting line-by-.line estimates. First, 

each proposal could be estimated in isolation against current law with a 

separate line for displaying interactions among proposals (a "stacked first" 

table). Second, each proposal could be estimated assuming all other proposals 

are already in the law. again with a separate line for displaying interactions 

among proposals (a "stacked last" table). Finally, the proposals can be 

displayed using a sequential stacking order whereby each estimate assumes all 

prior proposals are already in the law (a "stack-up" table). 

Assume an extreme example of a package with three separate proposals. each 

of which has the effect of closing the same "tax loophole" and generating $100 

of additional tax payments. In a "stacked first" table each proposal might be 

shown to generate $100, and the table would include a line showing an interaction effect of -$200. In a "stacked last" table each proposal would show a 

zero revenue effect and the interaction line would show a positive $100 

revenue effect. Finally. a "stack-up" table would attribute the $100 of 

revenue gain to the first proposal listed. zero to the other two proposaJs. 

and would have no entry in the interaction line. 

As a result of the sequence through which Treasury I and Treasury II were 

developed. revenue estimates were made and presented in the summary tables 

following a specific "stack-up" format. The general pattern was to repeal 

credits first. estimate base-broadeners second. estimate the effect of rate 

reductions third, and estimate the effect of changes in the minimum tax last. 

The tax reform revenue estimate table prepared for use in the Administration ·s 

FY 1988 Budget has most individual provisions stacked last . These estimates 

are shown in the Appendix table. Thus. this table has an interaction term 

(Item I.A. 7). Provisions affecting corporations continue to be stacked 

following a specific sequence (see introductory text in the Appendix). 
20 Howard W. Nester 

It is obvious that line entries will vary from table to table depending on 

the stacking order used and that they will represent answers to different 

questions. No single table format covers all possible options. Some of the 

confusion surrounding revenue estimates can be minimized if users analyzing 

and interpreting specific entries on a table first determine what is-or is 

not-included in the line of interest. 

Interpretational Issues. As mentioned earlier, a revenue estimate is a 

summary measure of the change in tax payments over a selected budget period. 

As such it is a cash flow measure whose primary use is to indicate the extent 

to which borrowing or other fiscal policies must change. Revenue estimate 

tables combine the effects of timing proposals (such as changes in the rules 

for making estimated payments) with the effects of permanent changes in the 

tax system (such as rate reductions). Analysts must therefore be careful in 

interpreting revenue estimates of deferral items. Those who combine the 

revenue effect of timing proposals with the revenue effects of permanent 

changes have a correct revenue estimate but run the risk of misunderstanding 

or misrepresenting what has actually changed as the result of a tax proposal. 

For instance, repeal of the bad debt reserve method for non-financial corporations and "large" banks (Items Ill.E and IV.A.l) had a large one-time revenue effect from ending deferral on existing reserves with a small permanent 

pickup. 

Another problem with interpreting revenue estimates exists when taxpayers 

pay "implicit taxes" in the form of lower pre-tax rates of return. After-tax 

incomes do not necessarily change by the amount of the revenue estimate. For 

example, changes in the deductibility of interest by commercial banks may 

result in their substituting taxable for tax-exempt securities with individuals doing exactly the opposite. A revenue estimate table would then show an 

increase in tax payments by corporations and a decrease in individual payments. Due to higher yields on taxable securities, after-tax incomes in both 

sectors may remain essentially unchanged. (Item IX.B.) 

V. SPECIFIC EXAMPLES OF BEHAVIORAL ASSUMPTIONS 

THAT ARE INCLUDED IN OTA REVENUE ESTIMATES 

This section discusses examples of behavioral responses that are typically 

included in Treasury revenue estimates (with emphasis on tax reform estimates). In some instances explicit modeling of taxpayer responses is necessary because the economic forecast either does not or cannot effectively take 

them into account. Examples include proposals affecting capital gains 

realizations (which do not arise from current production and are therefore 

excluded from GNP accounts) and the effects of proposals not included in the 

original budget compilation. 

In other instances estimating taxpayer responses is quite clearly ·a 

necessary step in more accurately portraying the ultimate effect of a tax 

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Interpreting the Dynamic Elements of Revenue Estimating 21 

proposal on tax receipts. Examples include shifting of portfolio holdings by 

individuals. additional or altered borrowing patterns, and effects on mergers 

and acquisitions in response to changes in tax law. 

Examples of behavioral responses included in tax reform estimates (item 

references are to entries in Table 1.1 in the Appendix): 

A. Payment responses 

One of the more important (and frequently overlooked) components of a 

revenue estimate is the assumption as to taxpayers' "payment response" to 

proposed changes in tax law. Variations in payment patterns can significantly 

affect the timing of collections over a forecast period. The problem is that 

there are several options available to taxpayers in the tax code for satisfying requirements for making timely payments of estimated taxes and final tax 

liability. Revenue estimators must take these options into account. At the 

same time, changes in tax law-particularly major changes-will be accompanied 

by an adjustment period in which taxpayers move along a "learning curve" and 

gradually adapt to the new law, overstating and understating tax payments 

until the desired level is reached. Revenue estimates also include 

assumptions as to how quickly taxpayers will move along this curve. 

7 

A particularly difficult estimating problem involves withholding of 

individual income taxes under tax reform. In the past most individual 

taxpayers employed a process of incrementally adjusting their withholding 

allowances to reach a satjsfactory and stable level of withholding. As a 

result of tax reform taxpayers must review and revise their withholding 

allowances by October I. 1987. If they do not, they will face additional 

mandatory withholding amounts that may create a heavy penalty for misstatement. It is not possible to anticipate the kinds of responses that a massive 

new review will entail, so tax reform estimates continue to reflect historical 

patterns (see introductory text in the Appendix). 

The subsequent release and modification of new withholding forms has added 

a further element of uncertainty to revenue estimating. Taxpayer response to 

these new forms will not be Jmown for quite some time. One result will be 

that it will be extremely difficult to interpret collections experience for 

several years. 

B. The "Stagger" Effect (Item I.A.]) 

Faced with a phased reduction in tax rates over the next two years (the 

"stagger" effect"). taxpayers will defer income and accelerate deductions to 

minimize taxes. Nonwage personal income subject to such shifting was reviewed 

and net tax liability on individual tax returns for calendar year 1986 was 

estimated to be lower by $12 billion as a result of the stagger. Of course. 

calendar year J 987 (and to a lesser degree CY 1988) returns will have higher 

incomes and taxes as a result, but these will be taxed at lower rates. The 
22 Howard W. Nester 

total budget period effect of the shifting could be as high as -$3 billion. 

Items considered likely to be shifted are essentially discretionary items, 

such as charitable contributions, partnership incomes, bonuses, prepaid 

expenses, etc. 

It should be noted that there is a limit to the extent to which shifting 

can occur. In many instances, the two parties to a transaction will be on 

opposite sides of the issue. For example taxpayers trying to accelerate 

deductions into 1986 may be trying to make payments to taxpayers who are 

themselves trying to defer income until 1987. 

C. Capital Gains (Item IV.A.). 

Treasury estimates of the effect on revenues from changes in the (net) tax 

on long-tenn capital gains realized by individuals include substantial behavioral responses. Faced with future capital gains rate increases, taxpayers 

will, in the short run, accelerate realizations; in the long run they will 

increase their holding periods over what they would otherwise have been. One 

effect of extended holding periods will be that more gains will pass into 

estates (and thus escape tax altogether). These effects are taken into 

account in the revenue estimates. 

The elasticities used (relating realizations to the tax price) range from 

about -1 in the short run to -0.5 in the long run. On net, approximately 80% 

of the "static" gain in revenue from the change in tax rates applicable to 

long term capital gains as a result of tax refonn is not included over the 

budget period due to behavioral changes (see Treasury Capital Gains Report). 

D. State and Local Taxes (Item I.D. l .) 

Treasury estimates of the revenue effect of denying or limiting the 

deductibility of selected state or local taxes assume that these entities will 

change their laws to reduce the effect on their constituents. The estimates 

assume that between 15% and 20% of the "static" effect of disallowing sales 

taxes as an itemized deduction will be lost over the five year budget period 

as states and localities shift to other (deductible) taxes. (See Kenyon 

( 1986) Deductibility of State and Local Taxes). 

E. Passive Losses (Item XVI.A.) 

In assessing the impact of the passive loss provisions of the tax reform 

bill. interactions with other tax reform provisions. such as the minimum tax 

and the investment interest limitation. were taken into account. The estimates reflect taxpayer behavior in the following areas: a) changes in holding 

periods for existing investments. b) induced selling of assets. c) changed 

investment plans for taxpayers in the future. d) increased investment by 

corporations in these activities. and e) shifting from debt to equity financing (see Section IV.B. of Burman. Neubig. and Wilson (1987), this volume). 

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Interpreting the Dynamic Elements of Revenue Estimating 23 

F. Corporate Minimum Tax (Item XIII.B.) 

In analyzing the possible effects of the new corporate mmtmum tax, 

substantial offsets to initial static model output were made to reflect 

responses such as additional mergers, sales of assets, additional leasing, and 

changes in the discretionary elements that comprise financial statement 

income. The offsets represented as much as $7 billion (or two-thirds of the 

static $10 billion total) in 1991. 

G. Limits on Consumer Interest Deductions (Item XII.A.) 

Estimates of the revenue effect of proposals limiting consumer interest 

deductions include substantial offsets to reflect shifting of consumer portfolios towards tax-preferred assets. The prime example is increased home 

mortgage levels in a regime where mortgage interest on first and second homes 

remains deductible. The TRA '86 estimates include offsets for taxpayers who 

dispose of assets to pay off debt. 

H. Investment in Equipment and Structures (Item II.A.) 

Changes in the cost recovery rules affect the cost of capital and thereby 

change the relative demand for equipment and structures. To generate a more 

realistic portrayal of the impact on receipts of such proposals, the mix of 

depreciable investments was reallocated (while holding total investment 

constant) as a result of the proposal. Available evidence in the economics 

literature is limited and mixed on the extent to which this shifting would 

take place. For Treasury II. approximately $35 bilJion of investment in 

equipment was transferred to structures between 1986 and 1990. This represented less than l percent of total gross private domestic investment over the 

same period. The shifting is much less pronounced as a result of final tax 

reform provisions. (See Fullerton, Henderson , and Mackie, this volume). 

I. Individual Retirement Accounts (Item XIV.A.) 

Estimates of the effect of changes in the deductibility of contributions to 

IRAs (and the deferral element) take into account the substitutability of 

these for other tax-preferred savings vehicles. such as 40 I K plans. Roughly 

20% of the disallowed. IRA deductions were assumed to flow into cash or 

deferred accounts. 

J. Bank Carrying Costs for Tax-Exempt Bond Holdings (Item IX.B.) 

The extent to which revenue estimates are affected by changes in the 

financial behavior of taxpayers is especially apparent in provisions affecting 

financial institutions. The disallowance of interest deductions by banks on 
24 Howard W. Nester 

funds borrowed to purchase tax-exempt securities affects the behavior of banks 

in their role as lenders and in their role as borrowers. Because many banks 

will find tax-exempt securities less attractive. their demand for tax-exempt 

securities will be reduced. As a result of adjustments in the portfolios of 

the nonbank sector. more tax-exempt securities will be held directly by the 

nonbank sector. This reduces the taxable income of the nonbank sector thereby 

offsetting much of the additional tax revenue from banks created by the 

provision. (See Neubig and Sullivan (1987). this volume). 

K. Information Reporting (Item V.C.) 

The anticipated revenue gain from the information reporting requirements in 

tax reform includes revenue that is the direct result of document matching. 

In addition. the revenue estimates include amounts resulting from an expected 

increase in voluntary compliance (since taxpayers are aware of the new 

document matching possibilities and are expected to accelerate payment of tax 

due rather than waiting to be audited). 

L. Repeal of "General Utilities" Rule (Item VI.F.) 

The total revenue effect of this provision over the fiscal year 1987 - 1991 

period is less than -$300 million. This relatively small amount masks large 

offsetting changes in corporate and individual income tax payments over the 

period. Some of this offset is due to the expected behavioral responses to 

the changed "tax prices" of completing certain distributions that were built 

into the estimates. These responses included estimating the number of "basecase" transactions that would take place anyway. the number of transactions 

that would take place with a carryover basis. and the number of transactions 

that would no longer occur. 

M. ESOP/Estate Tax (Item XIV.C.) 

The large negatives shown for this item in the Appendix table reflect the 

anticipated actions by taxpayers and estate executors to eliminate much of the 

estate tax that would otherwise be due. As a result of the newly enacted ESOP 

provisions. taxpayers are expected to build portfolios such that their estate 

can then sell eligible stock to ESOPs to obtain the estate tax deductions. 

The list could be extended with other examples. However. it is not 

intended as a catalogue of behavioral assumptions included in estimates. but. 

instead, as indicative of the range and type of adjustments that are routinely 

considered in calculating revenue estimates. 

It should be noted that the extent to which behavioral responses are 

included in revenue estimates depends in part on the scope of the proposal. 

Company-specific proposals (which include most transition rule proposals) are 

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Interpreting the Dynamic Elements of Revenue Estimating 25 

likely to reflect only changes in the tax accounts of the affected taxpayers. 

Such estimates are occasionally based on detailed information supplied by the 

taxpayer with no indication of alternative behavior that might be undertaken. 

It is also unlikely that the individual taxpayers response wiiJ have any 

measurable effect on economic variables (one test of when behavior should be 

taken into account). Estimates of 

p'roposals that affect larger aggregations 

of taxpayers (e.g .• steel industry, fann sector) are more likely to include 

behavioral responses for two reasons: a) there are measurable effects and b) 

published studies and analysis of the effects may be available to the estimator. Finally. estimates of proposals affecting all taxable units in the 

economy (e.g 

.• taxpayers, nonfLlers) or overall legal forms of business (e.g., 

corporations. partnerships) will reflect the full range of effects that the 

estimator has been able to incorporate in the models. 

Of course, there are several difficulties with estimating behavioral 

responses, the most obvious of which is the lack of data and

/or the necessary 

empirical work to determine relevant elasticities. In other. instances there 

may be both empirical research and theory to indicate the direction and 

magnitude of response to a proposal, but information on the pattern and timing 

of the response over the budget period is lacking. In such cases, where 

behavioral responses are a major element in forecasting the revenue effect of 

a proposal, the estimator combines any associated information with past 

experience and best judgment to produce an estimate. 

The fact that certain aggregate economic variables are modified and others 

are held constant in revenue estimating is not intended to suggest that no 

further changes in those that are held constant are possible. It is, instead. 

an approach to revenue estimating which is designed to hold to a minimum the 

use of uncertain behavioral responses attributed to tax policy initiatives. 

Much of the criticism of this practice is by analysts who assume large 

behavioral effects that work in their preferred direction and who minimize tax 

effects that work in the other direction . Treasury's intent is to err, if at 

all, on the side of not underestimating potential deficit effects. 

Finally. it should be noted with regard to all of the recent tax reform 

proposals. that they were not designed primarily as fiscal stimulus measures 

but were instead designed as efficiency and fairness measures. The changes in 

tax law were intended as improvements in incentives for long

-term growth. 

Further near-term improvements in such factors as labor supply. savings and 

investment levels. addition of taxpayers to the tax roles. and efficiency in 

the use of resources were all hoped-for effects of tax reform but were not 

depended upon for ensuring revenue neutrality. 

VI. COMMENTS ON THE ACCURACY OF THE METHODOLOGY 

It is difficult. if not impossible. to directly assess the reliability of 

the assumptions and methods underlying revenue estimates. One needs only list 
26 Howard W. Nester 

possible major sources of error to sense the difficulty the analyst has in 

retroactively comparin£ actual results with projected results. These errors 

may occur in: 

o The economic forecast. 

o Determining the tax base given the economic base. 

o Translating a proposal into changes in all relevant tax laws. 

o Translating the changes in tax law into initial effects on the 

taxpayer's tax return before behavioral assumptions. 

o Assumptions as to behavioral responses. 

o Interactions with other tax provisions. 

o Tax payment responses. 

o Differences in the implementation of tax laws from initial assumptions. 

A (limited) source of confidence in the methodology and assumptions used in 

making revenue estimates is the ability of OTA to accurately forecast total 

near-term tax collections. As described in Section II, receipt estimates 

combine both aggregate time series equations and data with revenue estimates 

of changes in tax law generated using the methods and principle~ discussed 

above. The resulting totals have been found to be accurate and dependable 

inputs for use in anticipating Federal borrowing needs over the near··term. A 

review of the Fiscal Year 1977 through 1987 Budgets shows that the mean error 

in total receipts estimates for the first fiscal year in each submission was 

0.22 percent. The mean error for the second year was only 2.6 percent. 

despite the fact that the receipt totaJ potentially included all sources of . 8 

error mentioned above. 

Of course. most tax code changes have delayed effects on budget receipts, 

with their full impact on receipts occurring only after two or three years, so 

that accuracy over the short term is only indicative. 

In a J 981 study of OT A's methods. the Congressional Budget Office found 

that, after abstracting from differences between actual economic conditions 

and the Administration forecast and from differences between proposed and 

actual tax law changes, the OTA was remarkably accurate in forecasting total 

budget receipts. The overall error for the J 963 - 1978 period was about l%. 9 

As noted in Section II. OTA's general approach to forecasting income tax 

receipts for inclusion in the Administration's budget is to add estimates of 

changes in tax law to a "constant law" tax liability. This approach forces 

frequent reconsideration of many revenue estimates associated with tax law 

changes enacted after the base year. a reconsideration which includes review 

· of aJI inputs to the estimates. New information. in particular the results 

of tax return tabulations. is thus incorporated into the estimating methodology. Similarly. the results of studies and analysis by economists in other 

organizations are reviewed and. when appropriate included in the revenue 

estimating process. This constant internal and external review serves to 

increase the overall accuracy of the estimates. 

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I Interpreting the Dynamic Elements of Revenue Estimating 27 

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VII. SUMMARY 

This paper has outlined some of the major elements and assumptions that go 

into revenue estimates. These include the role of the Administration 's 

underlying economic forecast. the models used to detennine initial revenue 

effects. assumed behavioral responses. items not included in estimates, and 

the fonnat used to summarize the estimates, all of which are possible reasons 

for differences between estimates produced by different economists. The 

fundamental message is that there is a set of logical steps in the economic 

analyses underlying all revenue estimates. One of the steps is the incorporation of significant behavioral responses where economic theory and empirical 

evidence provide sufficient guidance to make reasonable estimates. 

APPENDIX 

The estimates in Table 1. 1 are drawn from revenue estimates supplied to the 

Congressional tax writing committees by OT A on January 9, 1987. They are 

based on the Fiscal Year (FY) 1988 budget forecast. In general, the effects 

of each individual provision are estimated assuming enactment of all other 

provisions. Corporate provisions were estimated in the following sequence: 

I) rate changes; 2) changes in credits: 3) changes in capital recovery 

provisions: 4) base broadeners; and 5) minimum tax provisions. 

The individual estimates assume that the relationship between collections 

- and tax liability is unchanged from current law. Fiscal year revenue effects 

may be significantly altered depending on the taxpayers' response to changes 

in withholding tables and rules governing payment of estimated taxes. 

Table 1. 1 REVENUE ESTIMATES -

TAX REFORM ACT OF 1986 

19117 

I. INDIVIDUAL INCOME TAX PROVISIONS 

A. BMic RRtt Strucwre 

I a~ rates of IS% and 2R% 

!does not include capiull g11ins) 

· 26011 

2 lncre1se In standard deducuon 

3. C'rea~e r<·rsonal exemplion 10 S2000 with 

p h aSt'· llUI o&~Ctl on ii~Ho e Income 11\-IC>h 

- evt~e lfeatmt-nl ol the eltlet h & blinll is~ll ow personal exemption j,~, 4115 

new dependent tiler~ 65 

J Rtluncl down inllnti(>ll udju<tntt·n• I<' S:>O muh•pk 0 

:" Rept•at t"'o-e11rne• llt'llunivn 1500 ... Rcpe11l income ttvest~g np 450 

7 lnteraC'tion Rmong individual tax ruov•~•ons ·314 

Fisc11i \'ear Tout I 

19111! 19119 1990 1991 19117-91 

($Millions) 

·3KI4Q ·:"092fl ·:"767(1 ·1\374.5 ~36.507 

-4433 ·6449 ·7004 . 7561) ~5 :'i! 

~H59~ -2H IKK .;:9.:::"9 30~117 13.:: 3~ 

711 1 1001 lltiM 15111 511fl 

,Q,., IQ4 IQJ ICI4 K43 

0 J <13~ 1-lil 260-

nO I~ t>IQJ MiO 113M s~o 

1731 11!37 1979 2115 Mll2 

4~1 l!:'iK 934 397 Z2% 
I 

28 Howard W. Nester I 

Table 1. J REVENUE ESTIMATES (continued) I Fiscal Year Total 

1987 1988 1989 1990 1991 1987-91 

cs M IUIOnsl 

B. ReviM: earned income credit. lndlvidual I 1 

Receipts 

·356 -852 -1054 -1279 -3541 

Outlays -52 

-1535 -2649 -2719 -2764 -9719 

C. Exclusions from Income I. Repeal partial exclusion of unemployment I compensation benefits 320 1045 984 945 920 4214 2. Scholarships and fellowships 57 209 273 288 296 1123 I 3. Limit preM:nt law exclusion tbr certain prius and awards 2 2 2 2 8 D. Deductions for Personal Expenditures I. Itemized deduction for State & local sales taxes I Individual 79-4 5185 4.5110 45.5.5 4681 1979.5 

Capitalization Rule tor state and local taxes 

Individual 47 119 96 78 59 399 

Corporate 4811 738 603 .521 3.51 2700 

2. Medical expenM: deduction- I lncreaM: floor under such deductions 

to 7 . .5 pertt!nt of AGI b 223 1504 1590 1599 1607 6523 

3. Adoption expenM:s repealed I 2 2 2 2 9 4. Deductihlllty of mortgage interest and tlltes 

aUocable to certain housing allowances • • • • • 

.I 

E. Expenses for Busineu or Investment 

I. Meals, travel, and entertainment expenses 

Restrict deduction of business meals expenM:~ I and husiness entertainment expenses to 80'Jf 

Individual 367 62.5 700 784 8.57 3333 

Corporate 8118 1467 161.5 1833 2022 782.5 

FICA and SECA 63 112 133 149 180 637 

Limit deductions for luxury water travel I Individual 3 3 3 3 13 

Corporate • • 

No deductions for educational travel 

Individual 4 13 14 14 14 59 

Corporlle • • • • I No deductions for investment seminars Individual 3 3 3 3 13 

Corporate • • 

Charitallle Travel I lndivklual • • 

2. Emplo)'ff husiness expenses. investment expenses 

and other miscellaneous Itemized deductions subject to 2 '.\ floor 716 47111 4903 .53.54 .5801 21555 

3. Limit horne 

oftice expenM: & hobby loss deductions I Home oftltt! expenses, Individual • • • • • 

Hobby losses, ln\lividual • • 

F. 

Political Contributions Tax Credit Repealed 275 293 21111 295 liS I 

SUBTOTAL 

Individual 

-37700 

-411617 -626t!4 -{;9101 -75441 -293543 I 

Corpor11te 1376 2205 2218 2354 2373 10525 

FICA and SECA 63 112 133 149 180 637 

I Outlays -52 -1!13.5 -2649 -2719 -2764 -9719 

SUBTOTAL. INDIVIDUAL INCOME TAX 

-3631 3 -47836 -62982 -69317 -756S2 ·292100 

II. CAPITAL COST PROVISIONS I A. Cost Recovt>ry: Deprt>ciarion: lTC: Finanl·c LI.'H~l'S I. Depreciation and expensing 

Modify Accelerated Cost Recovery SyMem I Individual -617 -1:!:!0 -594 421 1943 -67 

Corporate 

-1727 -:!179 -7!!6 1951 606K 3327 

I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 29 

Table 1.1 REVENUE ESTIMATES (continued) 

I Fiscal Year Total 

19117 1988 1989 1990 1991 19117·91 

(S MIUions) 

I 2. Regular Investment Tax Credit 

Repeal investment tax credit effective J en. I . 1986 

lmlividual 5249 5158 5656 6098 6801 28961 

Corporate 19379 171167 211!65 25304 281123 113237 

I 

Reduce tran~ili n JTCs & currylorwards lly 3~~ 

Individual 60 199 270 191 95 1115 

Corporate 252 1447 1624 lOIII 583 4987 

J. Repeal linance lease rules eHective January I. 19117 

Corporate 121 325 436 431 1313 

I Limit on Business Credits (75%) 

Individual • • • • 

Corporate 9114 385 251 148 1!5 1853 

IS year carryback of unused ITCs for steel 

I 

Corporate 0 -565 23 51 82 -409 

15 vear carrvback of unused ITCs for fanner~ 

'tndiviuu81 0 -234 0 Ill 30 -11!6 

SUBTOTAL 

I lnoividual 4692 3903 5332 6728 8869 29523 

Corporate 18888 17076 23302 211971 36072 124308 

SUBTOTAL.ACRSANDITC 23580 20978 211634 35699 44941 153831 

I Ill. ACCOUNTING ISSUES 

A Deny the Use of the Cash Method of Accounting hy 

I 

Financial Institutions (Including Finance Companies) 

Corporate 395 712 762 7K7 484 3140 

B. Slmrlllled DoUar Value LIFO Method for Certain 

Small Businesses 

I 

Individual 0 -4 -9 -9 -7 -29 

Corporate · II -124 -212 -191 -136 -674 

c Limit Use of the Installment Method 

Deny for sales under revolving credit plan. 

I portion of sales by uealers in personal property. 

sales of publicly traded property 

Individual 19 so 36 36 37 178 

Corporate 1271 1663 1345 13511 1395 7032 

I D Uniform Capitali7.&tion Rules 

Require cepitulizing lx:lth direct and indirect production costs for manuf11cturing. construction. and developmem 

lndividuul 2KO 643 679 61!0 653 2935 

I Corporate 5947 8246 71!20 6992 6601! 3,613 

E. Disallow Reserve Method tor Bad Debts Other than 

Selected Financial Institutions 

Individual 32 95 91 92 92 402 

I Corporate 992 1536 1475 1489 1491 6983 

F. Repeal Election to Deduct QuHiitletl Discount Coupons 

Corporate 0 47 37 31! 39 161 

I G. Solvem T&Jtpayers Required to Recognize Income from 

Cancellation of lndebtednes~ 

Individual 2 4 3 3 2 14 

Corporate 57 79 62 52 43 293 

I H Conform Ta~allle Years ''f Partnerships. S Corponttions. 

and Personal Service Corporations to Owner~ 

Individual 0 53fi 370 377 27K ISh I 

I I . Public Utility Billing Rule 

Corporate 191 356 31!4 3117 200 I Sit! 

I 
I 

30 Howard W. Nester I 

Table 1.1 REVENUE ESTIMATES (continued) 

Fiscal Year Total I 

1987 19118 1989 1990 1991 1987

-91 (S Millions) I 

J. Pre

-1984 Rules for Depreciation RecapturelnstaUmem Sales of Farro Irrigation Equipment 

Individual 

Corporate 

• • • • • • • • • • • • I 

K. Contributions in Aid of Construction 

Corporate 66 126 152 177 201 722 

SUBTOTAL I Individual 333 1324 J 170 1179 1055 5061 Corporate 11908 12641 1825 11089 10325 ~47811 

SUBTOTAL. ACCOUNTING ISSUES 9241 13965 12995 12268 11380 59849 

IV. CAPITAL GAINS I A. Repeal Long-tenn Capital Gains Exclusion I for Individuals 125 Ill -1495 -59 3364 7442 21770 B. Corporate Capital Gains 

Alternate Capital Gain Rate of 34% 526 904 1034 1211 1250 4925 

I 

C. Liberalize Incentive Stock Options 

Individual 

-·· 

-·· -·· -·· 

-·· 

-·· 

D. Straddles 

I Individual 12 • • • 12 

SUBTOTAL 

Individual 12518 

- 1483 

-59 3364 7442 21782 Corporate 526 904 10).4 1211 1250 4925 I SUBTOTAL, CAPITAL GAINS 13044 -579 975 4575 8692 26707 V. COMPLIANCE AND ADMINISTRATION I A Increase Penahles 

Individual 49 279 376 384 393 14RI Corporate 211 76 110 112 115 441 I Excise I K 9 10 10 311 Esuue and Gift 0 s 7 7 7 26 

B. l RS Interest Provisions • 

Individual 34 98 

177 2511 351 918 I Corporate 65 177 303 418 554 1517 Outl11ys -35 -140 -144 -Ill · 114 ·544 

c. Information Reporting 

I Individual 250 763 1081 1103 I 157 4354 Corporate 0 70 5 5 5 K.S 

D. Tu Shellers 

Individual • • • • 

I E Estimated Payments 

I. By Individuals (90%) 

Individual 15KO 

-3 4K 113 116 IK24 

2. Tu

-exernpt Orgs. (Unrelated Business lm:ome) 

I Corporate 35 2 2 2 2 43 

3 . Private Found11tions (Net Investment Inco

me) 

Excise 125 17 .5 7 10 164 

F. Tax Utig~ttion and Tax C<lurt I User Fees * * • 

I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 31 

Table I. J REVENUE ESTIMATES (continued) 

I Fiscal Year Total 

19117 1988 1989 1990 1991 1987-91 

(S MiUlons) 

I G. Tall Administration Provisions 

Individual 

Corporate 

I H. Waiver of Criminal Pen allies if Voluntary Olsclo~ure 

Individual • • • 

Corporate • • • 

I. Modify Withholding Schedules 

I Individual 239 ·4117 ·22 -20 - 19 II J. Increase In Voluntary Compliance 

Individual 511 490 693 652 668 2S61 

I Corporate · 23 ·54 -6S -66 ·68 · 276 

SUBTOTAL 

Individual 2210 1140 23~3 2490 2636 101129 

Corporate ·~ 271 3SS 471 608 11110 

I User Fees 0 0 0 0 0 0 

Excise 126 2S 14 17 20 202 

EMilie and Gift 0 s 7 7 7 26 

Outhtys 3~ · 140 ·144 ·Ill -114 -S44 

I SUBTOTAL. COMPLIANCE 2406 1301 2585 2874 3157 12323 

VI. CORPORATE AND GENERAL BUSINESS TAXATION 

I A. Corponlle Tu Rates c 

Revise corporate rates and graduated struc:IUre 

(top rate to~~~ 

Corporate ·6629 -19092 ·27S62 ·31160 · 35189 · 120232 

I B Dividends Received Deduction 

Reduce COI'porate dividend received deduction to 110~ 

Corporate 121l 209 222 241 257 JOSS 

I c Refleal $1()() Dividend Exclusion for Individuals 

lndivklual K7 576 ~68 5116 604 2421 

D. Redemption of Stock PaymentJ 

I 

Repeal deductihility or "greenmail" rayments 

Corporate .. •• .. E. Special Limitations on Net Operating Loss Carryuvers 

Corporate 9 29 JQ 38 29 J.44 

I F. Repeal "General Utilities· Rule 

Individual 342 -1404 -1474 -15411 -1625 -6393 

Corporate 221! 1057 1336 1622 18117 6130 

I G AJiocation Clf Purchase Price in Ct'nain Sales of A~set~ 

Individual ·6 -7 -7 ·1 ·1 -34 

Corporate 71 611 1!5 101 114 439 

H btraordinary Dividends Received 

I Corporate JO 52 ~ 57 60 153 

I. Rt'pelll Various Rapid AmC'ni:tllti<ln ElectiC'ns 

Repeal S >~•r amortization for tra~mark expen5t'~ 

I 

Individual 0 3 II l!i 23 49 

C(ll'porate 2 h 15 26 311 M7 

Amoniuuion of railroad tunn~ls 1111ll hort>\ 

C<lrporlllt • .l 

five ytllr writl' olr Of hilS 01~1 Hlllll! n~lll\ 

I Cortll>rate ~0 !0 

I 
I 

32 Howard W. Nester I 

Table I. I REVENUE ESTIMATES (contin

ued) 

Fiscal Ye.ar Total I 

1987 1988 1989 1990 1991 1987-91 

($ MiDionsJ 

J. Other CapiiHI Related Costs I 

Limit Morine CCF 

Corporate 3 4 6 6 24 

K Tax Regulated lnve~unent CompHnies on C11

1eno11r Ye11r 

B11sis and Eliminate "SpiUover• Dividends I 

Individual 406 471 26 27 27 957 

E:\dse 6 6 6 7 25 

L Mortgage-Backed Securities-·REMIC~ 

Corporate 

-2 

·6 -13 

-23 -32 -76 I 

SUBTOTAL I Individual 145 -361 ·1179 ·927 -978 -3000 

Corporate -6182 - 17673 -25819 

-29692 -32830 

· 1121% 

E~tclse 0 6 6 6 7 25 

SUBTOTAL, CORPORATE AND I GENERAL BUSINESS TAXATION -6037 · 180211 -26692 ·30613 -33801 -11517 1 

VII. ENERGY. AGRICULTURE. TIMBER. AND NATURAL RESOURCES A. Agriculture I. Limit Soil and Water Conservation Expenditures I ~n\1 Repe11l Expenditures lor Clearing Lunll 

lnclividual 29 25 25 25 25 129 I Corporate IS 11 II II II 59 

2 . Re~trict Pre11a

yments of Farming El\penses Over 

SO% of Annual Expense.~ 

lndividutll 50 5 2 2 2 61 

3 . Extend Scope of Expensing of Costs of Replanting I lndivlc.Jual · I ·6 -10 · 13 · 13 -43 

Corporate .. 

-· 

-· 

.. 

-· -· 

4 . Discharge of Indebtedness Treatment of Fanners 

Individual 

·9 

-10 -8 ·1 ·5 -39 

5. Capiutllzation of Preproductive Expenditures I 

Individual 56 160 147 141 146 650 

Corpon11e 41 61 55 53 53 263 

B. Energy and Natural Resource~ I I. Domestic Production 

Pen.;entage Depletion Offset for Cotd & Iron Ore 

Royalties Due to Deletion of Capital Gains Rates 

Individual 

-7 

- 17 

. J7 

-Ill 

- 19 

-78 

Corporate 

-I -2 -2 

·2 -3 ·10 I Oil nnd Gas (except foreign IDCs) lndrvldual 19 52 59 68 77 215 

Corporate 56 104 125 136 II II 539 

Httrd Minerals E&D and Percemage Depletion 

lnc.livic.lual 0 0 0 0 0 0 I Corporate 20 30 28 27 26 131 

2. Foreign Explonttion & Development Costs anll IDCs 

Corporate 4 6 5 s 21 

3. Extend Energy Related Credits and Incentives at 

I Rtdut~l Rates Extend solar. geothermal. biom11ss. wind. 

and ocean credits lnllivlc.ltiBI -· 

-· .. 

.. • 

Corporate 

-3110 

-87 II 22 15 -419 I 4 Allow Residenliltl Energy Credit5 to Expire 

Individual 

.s. Reduce Gas Exemption lor Methanol to $.06 

Individual -· .. -· .. .. Corporate .. ·"' -· .. .. _ .. I Excise -'* .. -· -· -· 

I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 33 

Table 1. 1 REVENUE ESTIMATES (continued) 

I Fiscal Year Total 

1987 1988 1989 1990 1991 1987-91 

(S MiUions) 

I 6. Deny Duty-Free Treatment to Ethyl Alcohol from CBI 

Unless CBI is Source 

Individual -· -· -· -· -· -· 

Corporate -· -· -· -· -· 

Excise • .. • • • 

I Customs • • • • • • 

7. Gift & Estate Tu Deductions lor Conservation Easements 

Individual -· -· -· -· -· -· 

Estate aod Gift -· -· -· -· -· 

I SUBTOTAL 

Individual 137 209 198 198 213 9.5.5 

Corporate -245 123 233 2.52 221 .584 

Excise 0 0 0 0 0 0 

I Estate and Gift 0 0 0 0 0 0 

Customs 0 0 0 0 0 0 

SUBTOTAL, ENERGY. AGRICULTURE. 

I 

TIMBER, & NATURAL RESOURCES -108 332 431 4.50 434 1.539 

Vlll _ EMPLOYMENT AND EXCISE TAXES 

I A. Employment Taxes 

Ministerial Reelection Into FICA 

FICA • • • 

FUTA for Indian Tribes -· -· 

I B. Excise Tues 

Me<llvac Helicopters 

Excise -· -· -· _ .. -· -· 

SUBTOTAL 

I Individual 0 0 0 0 0 0 

E'clse 0 0 0 0 0 0 

FICA 0 0 0 0 0 0 

FUTA 0 0 0 0 0 0 

I SUBTOTAL. EMPLOYMENT AND EXCISE TAXES • • • • 

IX. FINANCIAL INSTITUTIONS 

I A. Reserve for Bad Detlts 

I. Commercial banks. Corporate 19.5 .560 IPS I 163 .51111 .3.3114 

2. Thrill in~titutions. Corporate 60 90 100 110 130 490 

I B. Interest On Debt to Purchase Or Carry T11x-exempt 

Obligations 

Individual -56 -299 -676 -10!19 -1448 -3.53K 

Corporate 8.5 3114 776 1156 1!13.5 3936 

I c Allow NOL's of Thrills to Eight Year Carryforw11rd 

Corporate 0 -60 -100 -100 -80 -340 

D. Reorganiz.atic>ns of FinanciaUy Troubled Thrifts 

I Coaporate 0 0 so 100 160 .\10 

E. Losses on Deposits in Insolvent Financltll ln~tituuon 

Individual -3 -I -1 -1 -I -7 

I SUBTOTAL 

lndividuRI ~9 -300 -677 -1 Ot\O -144q 354~ 

Corporatt' 340 974 170-1 :!4:!9 :!333 -;'-;'!(0 

SUBTOTAL, FINANCIAL INSTITUTIONS :!81 674 1027 1369 KK4 4B~ 

I 

I 
I 

34 Howard W. Nester I 

Table 1. 1 REVENUE ESTIMATES (continued) 

I Fiscal Yur Total 

1987 1988 1989 1990 1991 1987-91 

(S MIDions) 

X. FOREIGN TAX PROVISIONS 

A I Foreign Tux Credits 

Separate Foreign Tax Limitati

ons 

I Corporate 279 445 430 457 488 2099 Credit tor high withholding taxes on l111ercst 

Corporate Ill 174 158 258 409 I I 10 Tre11t111ent of losses Corporate 9 21 24 25 27 106 I Deemed-paid credit 

Corporate 6 20 61 88 99 274 

B. Sour<:e 

Rules 

Sales of inventory and property I Corporate • • • • 

Transportation Income Corporate II 16 19 25 31 99 Dividend~ and interest of 80/20's 

Corporate • • • • • • I Allocatjon of interest expenses 

Corporute 143 381 602 1120 1002 29411 

Allocation of expenses other then interest and R&D 

Corporate Sl! 92 97 102 107 456 I c Foreign Corporations of U.S. Taxpeyers 

Exp11ncl uhpurr F income 

Corpor11te ItO 

1114 179 196 

216 I!HS De nimi~ tllx have int-ome rule 

I Corporate 40 67 68 77 Ill 333 

Use of delicit~ In E&P 

Corporate 14 22 22 26 27 Ill 

D Spedal Tu 

Provisions I ~sesions tax credit 

Corporate 42 69 61! 1S 1!2 336 

Transfers of intangibles 

Corpor11te 24 60 113 110 140 417 

1. 

Forei11n investment companies 

Corporate 10 17 16 19 21 113 

E 

Foreign T11xpayers 

Branch lt:vel tax 

I Corponue • • • • 

Insurance· Cllfltllive insurance companies 

Corporate 25 

64 1111 115 146 

438 

Income of foreign governments CorrorAte 23 44 49 S:" 60 231 I Dual residence comp11nies 

Corporatt 73 126 JJl 140 151 622 

F. 

Foreign Currency 

Exchange Gains and Losses 

Corporate • • • 

G Red m·r Secuon 9 I I Exclusion to $70,000 I 

Individual 23 44 

49 55 60 :::31 

SUf\TOTAL I Individual 23 44 4<l 55 ()() ~31 

Ctlrporate 975 11!02 2096 251111 3011i 105411 

SUBTOTAL. FOREIGN TAX PROVISIONS 9911 11146 ~145 2643 3147 l07

i9 

XI. I INSURANCE PRODUCTS AND COMPANIES 

A Li

te ln ~u1 Hncr n~<lu t~ ami Cum ran it'\ I Repeat $1.000.00 exdusion of inrere~t income on <ll'Hth N>netit~ Individual • ---- I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 35 

Table 1.1 REVENUE ESTIMATES (continued) 

I Fiscal Year Total 

1987 1988 1989 1990 1991 1987-91 

(S MIUions) 

I AUow NOLs tor one insolvent life Insurance 

company to offset distributions from policyholder 

surplus ac:counts 

Corporate -· .. .. -· -· -· 

I 

Tax Blue Cro~s-Blue Shield and certain other tax-exempt 

insurance comp11nies under special tax rules 

Corporate 1111 162 193 187 176 1106 

Tax ~tructured settlement company investment income 

(except tor seulements arising out of physical 

I injury or sickness) 

Corpontte • • • • • • 

Repeal 20~ lite insurance company deduction 

Corporate 393 699 751 807 864 3514 

Exemru certain burial insuranc:e contracts from the 

I statutory definition of life insurance 

ln<.lividual -· -· -· -· -· ... Disallow deductions lor interest payments on cert11in 

corporate policyholder loans 

Corporate • • • • • • 

I Disallow deductions for certain insured losses 

Corporote • • • • • • 

B. Property and Casualty Insurance Companies 

I 

lndude 20~ of annual increase in unearned 

premium reserves as taxable income 

( 10% lor bond insuranc:e) 

Corporate 230 318 255 234 245 1282 

lnc:lude 20% of existing unearned premuim reserve as 

I taxable income (10~ for bond insurance inrome) 

over next 6 years 

Corporate 254 432 469 512 495 2162 

Reduce deductions lor losses Incurred by a specified 

proportion of tax-eJtempt interest & dividtmds rec:eived 

I Corporate 19 74 156 258 358 1165 

Pret11x discounting of loss reserves 

Corporate 374 667 757 714 566 30711 

Repeal protection against loss account 

CNporHtC 511 76 611 44 24 270 

I A<ll>flt single. small company provision 

CorporHte -14 -33 -21 -25 -24 -123 

SUBTOTAL 

I lndivi1ht111 0 0 0 0 0 0 

Corpor11te 1402 2395 2622 2731 2704 I 11154 

SUBTOTAL. INSURANCE PRODUCTS & COMPANIES 1402 2395 2622 2731 2704 llll54 

I XII. INTEREST EXPENSE 

A. Nonbusiness lttterest Limits 

DisHIIow consuml'r interest 

I Individual 1095 271l5 4056 5161 6056 19153 

Limit inve~ttucnt intere~t 

Individual 145 351 495 6311 7611 2397 

B. Disallow deduction lor in1crest to 1'1!nd IRA's 

I lndividuHI • .. • • • 

SUBTOTAL 

Individual 1240 3136 -1551 5799 61124 ~1550 

I SUBTOTAL. INTEREST EXPENSES 1~40 313f! 4551 5799 hK:!4 :!1550 

XIII. MINIMUM TAX 

I A. Individual Minimum T11x (21 %1 lmlividu111 1377 3656 941! -41<7 -1016 447K 

I 
I 

36 Howard W. Nester I 

Table 1.1 REVENUE ESTIMATES (continued) 

Fiscal Year Total I 

1987 1988 19R9 1990 1991 19117·91 

<S MiDions) I d 

B. Corporate Minimum Tax (20"-) 

Corporate 2717 4649 4760 422.5 3.532 19883 

SUBTOTAL I Individual 1377 36.56 9411 -4117 ·1016 44711 

Corporate 2717 4649 4760 422.5 3532 19883 

SUBTOTAL, MINIMUM TAX 4094 1!30.5 .57011 3738 2.516 24361 

XIV. PENSIONS AND EMPLOYEE BENEFITS I A. Pensions I Limit IRA deduction lor individuals not covered by 

retirement plans 

Individual 21 1 47.511 4.576 4609 4797 189.51 

Limit deferrals of employee cash or deferred arrange· 

ments. 11nd tax-~heltered annuities to $7000. Additional I $2.500 deferral If Invest in employer securities 

Individual 276 393 491 614 768 2.542 

Apply nondiscrimination tests of CODA's to aU 

employer matching contributions lndlvldmtl •• •• •• 

•• •• .. I Permit tax-exempt employers to maintain CODA's 

lndivldmtl 

... 

... . .. . .. . .. 

-·· ModifY coverage tests and vesting requirements of 

qualitied plan~ I Individual •• •• •• • • •• ... 10"- additional Income tax on early withdrawls 

Individual 499 263 231 2.59 290 1.542 

Replace 10 )•ear averaging with S year treatment 

Individual 9.5 277 211 284 344 1211 I Deline normal retirement age 11s social security age 

and adjust ear

ly retirement assumption 

Individual 600 900 1000 1200 1343 5043 

Delay indexing of dollar limils to deljned 

contribution plans I Individual 0 2 4 s 12 

IO'Jt excise on qualified plan reversions 

Excise 250 125 20 20 20 435 

Phase out 3 )'ear recovery rule I Individual 11199 2100 1977 2049 20.50 10075 

Special rules tor Simplified Employee Plans Individual 

- 15 -35 

-40 -45 -SO - U!S 

B. Employee Benefits I Exclude educational assistance with cap Individual -126 -38 -164 

FICA -69 20 

-119 

Exclude group leg11l benefits 

Individual 

-109 -31! 

- l4i I FICA -42 -10 -52 

Exclude cam pus lo<lg i ng 

Individual 

.. 

-· 

-· 

-· 

-· 

AJiow seu·-employed to deduct 2Siil of health 

I insurance premiums Individual - 126 -244 -307 -114 -791 

Modify non-discrimin11tion tests for heulth plans. 

group-term life insurance. 

and establish unilorm 

definition of highly cornpens11ted employees I lndividtuil 7'5 13:! 144 156 507 

Modify tangillle prizes and 11wards treatment 

lndividu"l 

· 17 

-41! 

·!il ·5.' ·51i 

-225 

Modity accrued vacation pay Individual 5 )( 1 2 ~ 

19 I Corporate 80 5Q lti 17 14 IK7 

I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 37 

Table I. 1 REVENUE ESTIMATES (continued) J 

I Fiscal Year Total 

1987 1988 1989 1990 1991 1987-91 

(S MiUions) 

I c. Employee Stock Ownership Plans (ESOP's) 

Repeal present law eftective J11nuary I, 1987 

Corporate 1220 lOSS <408 21.5 80 297K 

Non-credit ESOP changes 

I Corporate -140 -188 -2<48 -293 -338 -1207 

Estate and Gift -666 -6<46 -1239 -11190 -2.581 -7022 

SUBTOTAL 

Individual 3192 8372 8224 89.53 9649 38390 

I Corporate 1160 926 176 -61 -244 1958 

E~clse 2.50 12.5 20 20 20 43.5 

FICA ·lll -30 0 0 0 -141 

Estate and Gift -666 -6<46 -1239 -1890 -2.581 -7022 

I SUBTOTAL. PENSIONS AND EMPLOYEE BENEFITS 382.5 8747 7181 7022 6844 33620 

XV. RESEARCH AND DEVELOPMENT PROVISIONS 

I A. Extend & Modlty R&D Credit Thru 1988 at 20% Rate 

(Increase Incentives for university research) 

Individual - 17 -IS -12 -6 -3 -.53 

Corporate -1383 -1072 -739 -399 -24.5 -3838 

I B. Adopt Rule tar Allocating R&D Expenditures 

Between U.S. 1101.1 Foreign Income 

Corporate -2.57 -138 0 0 0 -39.5 

I c. ExceptJon for Personal Holding Company Rules in 

Developing Computer Software 

Corporate -40 -10 -9 -7 -6 -72 

I 

D. Augmented charitable deduction for the donation 

of scientific equipment 

Corporate • • • • 

SUBTOTAL 

I Individual -17 -1.5 · 12 ·6 -3 -53 

Corporate -1680 -1220 -748 -406 -2.51 -4305 

SUBTOTAL. R & D PROVISIONS · 1697 -123.5 -760 -412 -2.54 -43.58 

I XVI. TAX SHELTERS AND REAL EST ATE 

A. Tax Shelters 

I 

Limit Nonpartlcipatory Losses & Credits (Passive Losses) 

Individual 841 3486 .58.56 8274 10352 2R809 

Corporate -40 -269 -707 -1134 -1636 -3786 

B. Real Estate 

I. At-risk Rules Extended to Real Estate 

I (Except third party non-recourse debt) 

Individual • • • • • 

2. 20% Credit for Historic Structures and 10% Credit 

lor Other Rehabilitatlon Expenditures 

Individual 61 222 343 410 472 1.5011 

I Corporate 42 122 174 20.5 232 775 

3. New Credit for Low Income Rental Housing 

Individual -80 -297 -.535 -707 -7911 -1411 

Corporate -7 -26 -47 -62 • 71 -213 

4 Modify Taxation of Real Estate Investment Trusts 

I Corporate 20 17 -!! · II -14 4 

SUBTOTAL 

Individual 822 34 11 5664 7977 10026 7900 

I Corporate 15 · 1.56 ·SilK · 1002 -14119 -3220 

SUBTOTAL. TAX SHELTERS AND REAL ESTATE 837 3255 5076 6975 8537 246110 

I 
I 

38 Howard W. Nester I 

Table 1.1 REVENUE ESTIMATES (continued) 

Fiscal V~ar Tot11l I 

1987 1988 1989 1990 1991 1987-91 (S Millions) 

I XVII. TAX-EXEMPT BONDS A. Restrict arhitrage and Umit nongovernmental use Individual 173 596 922 1181 1427 4299 I Corporate 299 521 481 350 193 11!44 B. Modify Refunding Rules for Tu·Ellempt Bonds 

Individual 14 70 167 270 342 863 

I Corporate .. • • • • • 

c. Ext~nd Information Reponing Require~nu to 

all tax-eJtempt bonds 

Individual • • • • • • I Corporate • • • • • • 

SUBTOTAL 

Individual 

Corporate 

187 666 1089 1451 1769 5162 299 521 481 350 193 18 .. 4 I SUBTOTAL, TAX-EXEMPT BONDS 41$6 1187 1570 11101 1962 7006 

XVIII. TAXATION OF TRUSTS. ESTATES, AND MINOR CHILDREN A. Unearned Income of Children Under Age 14 I Tax nn~arned Income of childr~n under age 14 111 parent's top marginal rate 

I Individual 92 254 208 224 ~34 1012 

B. Compress Present Law Rate Schedule for Income 

Estates 

lndividu11i 5 21 32 34 35 127 I Trusts 

Individual 30 124 194 203 214 

765 

C. Modified Tuatlon of Grantor Trusts 

I 

Individual 

•• .. .. .. . . 100 

D Generation

-skipping Transfer Tax 

Estate and Gili 

-· 

-· 

-· 

-· 

-· 

-· 

E Shorten Holding Period for Special R~apture I Ta.11 on Heirs 

Individual • • • • • • 

F. Extension of Time to Supply 

Information on Certain 

I Estate Tax Returns Individual -· -· -· -· -· 

G . Decreue Period of Tax Deferral for Trusts 

Individual 1150 128 133 135 137 161!3 I 

H. Payment of Income Taxes of Estates 

lndividu11l 361 257 29 31 32 

710 

SUBTOTAL 

I Individual 1638 784 596 627 652 4297 Estate 11nd Gifi 0 0 0 0 0 

SUBTOTAL, TAXATION OF TRUSTS AND ESTATES 1638 7114 596 627 652 

4:!97 

XIX. MISCELLANEOUS PROVISIONS I 

A Euend

/ Modily Targeted Jon~ Credits lb r 3 YtiH~ 

I (40'11. nue for first year employment And no creclit lb r ~ond year employment) Individual -22 -36 -39 -23 -14 -134 Corfl(lrate · 145 -240 -191! -Ill ·511 -752 

I 
I 

I Interpreting the Dynamic Elements of Revenue Estimating 39 

I 

Table 1.1 REVENUE ESTIMATES (continued) 

Fbcal Year Total 

1987 1988 1989 1990 1991 19117-91 

(S MIUions) 

I B. Extend E11pensing Costs for Removing B11riers to 

Handicapped 

Individual -2 .J -I • I -2 -7 

Corporate -21 -12 -14 - 16 -18 -81 

I c. Tax Relief for Viemam MIA Srouses 

Individual -· -· -· -· • 

I 

D. Eaempt anti Nonprofit Orgeniutlons Rentals of membership lists 

Corporate -4 -8 -7 -8 -9 -36 

Tax exemption for certain title holding companies 

Individual -2 -7 -11 -19 -29 -68 

I Corporate -3 -13 -22 -36 -57 -131 

Eumpt trade show income 

Corporate -4 -8 -12 -16 -22 -62 

Exception to membership organization deduction rules 

Corporate 0 -· • -· -· 

I E11cise 0 -· -· -· • • 

Tax-exempt status tor technology transfer organization 

Corporation -· -· • -· -· 

Distribution of Low-Cost Articles by Charities 

Corporation -· -· -· .. -· 

I E. Diesel Tal'. at Wholesale Level 

Ell else 5 • • • • !i 

I 

F. Allocation of Co-op Housing Interest end Tues 

Corporate -· -· -· -· -· 

G. Ch11nge in Gasoline Excise Tax 

Individual -12 -19 -19 -19 -69 

I Corporate -2 -3 -3 -3 -II 

Ellcise 300 200 200 200 900 

H Foster Care P11yment 

Individual -5 -8 -9 - I I · 12 -45 

I Reindeer Related Income 

lntlividual -· -· -· .. -· • 

I 

J. Treatment of Certain Technical Personnel 

lndividuttl • -· -· -· -· 

FICA • • • • • 

SECA -· -· -· -· -· 

FUTA • • • • • 

I SUBTOTAL 

lndividuul -31 -64 -79 -73 -76 -323 

Corporate - 177 -283 -256 -190 - 167 -1073 

Excise 5 300 200 200 200 905 

I FICA -· -· -· -· -· -· 

SECA • -· -· -· 

FUTA -· -· -· -· 

SUBTOTAL. MISCELI--\NEOUS PROVISIONS -203 -47 -135 -63 -43 ·491 

I XX. TECHNICAL CORRECTIONS TO RECENTLY ENACTED LEGISLATION 

I SUBTOTAL 

Individual 

Corporate -175 - 17!i 

Customs 

:o~c ~e 

I Estate and Gilt 

FICA 

FUTA 

SECA 

I 
40 Howard W. Nester 

Table 1.1 REVENUE ESTIMATES (continued) 

Fiscal Year 

1987 19R8 

SUBTOTAL. TECHNICAL CORRECTIONS -115 

SUMMARY. TAX REFORM ACT OF 1986. 

BY SOURCE OF ESTIMATED REVENUE: 

TOTALS: 

Individual -9294 -24196 

Corporate 28252 25155 

Excise 381 456 

Customs 0 0 

Estate and Gift -666 ·641 

FICA and SECA -48 82 

FUTA 0 0 

0\lllays ·IIi - 1675 

TOTAL UNIFIED BUDGET EFFECT 185311 ·1119 

Less Ou !lays -87 · 1675 

TOTAL UNIFIED BUDGET RECEIPTS EFFECT 18625 856 

o es: 

Five year (1987-1991) totals may not add due to rounding. 

• = less than $5 million 

•• = less than $50 million 

-• = loss less than $5 million 

1989 1990 

(S Minions) 

-34216 ·32833 

23395 25320 

240 243 

0 0 -1232 - 1883 

133 149 

0 0 

-2793 -2830 

-14473 · 11834 

-2793 -2830 

· 11680 .90()( 

1991 

-29768 

27717 

247 

0 

·2574 

180 

0 

-2878 

-7076 

-2878 

-4198 

0 indicates a rounded number greater than zero but less than SSO million 

indicates orginal entry is zero 

Total 

1987-91 

-115 

· 130306 

129838 

1567 

0 

·6996 

496 

0 

· 10263 

·15664 

·10263 

-5401 

•outlays shown as negatives. 

b A direct expenditure program under Social Security is expected to offset the revenue 

increases. 

cDoes not include the Blue Cross/Blue Shield effect, which is included in a separate 

provision. 

d Does not incl ude any effect ofT ax Reform on corporate estimated payments made during FY 

1986. 

FOOTNOTES 

1 Ta\· Reform for Fairness, Simplicity, and Economic Growth, Volume I: Overview. November. 

1984. U.S. Department of the Treasury, pp. 245-254. 2

TIIe President 's Ta~· Proposals to rhe Congress for Fairness. Growth. and Simplicity, The 

White House. May. 1985. pp. 453-461. 

3 Budget of the United Statts Govemmemfor FY 1988: Supplement, The Office of Management 

and Budget. January. 1987 . pp. 4-15 - 4- 17. 4 For an example see The Tax Reform Act of /986 . Conference Report. Volume II. pp. 

11-861.11-885. 5 Much of the criticism of the "static" nature of revenue estimates-in the sense that they 

were assumed to exclude taxpayer responses to changes in tax law-was published in news media 

editorials and letters during the course of the tax reform debates. For example. see the April 

3- 15. 1985 series of Wall Street Journal editorials on reform referring to the static nature of 

Treasury estimates. 

I 

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I 

I 

I 

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I 

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I 

I 

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Interpreting the Dynamic Elements of Revenue Estimating 41 

6 The baseline forecast. which is generated by the Cou nci I of Economic Advisors. is grounded 

in thequarterlyeconometric model created by the Bureau ofEconomicAnalysis. Deviations from 

the model output occur as the initial forecast is reviewed and revised by the Treasury 

Department, theOfficeofManagementand Budget. andtheCouncilofEconomicAdvisors. The 

most recent version of the model is described in The BEA Quanerly Econometric Model of the 

U.S. Economy: 1985 Version. Bureau ofEconomic Analysis StaffPaper 44. U.S. Department of 

Commerce. July. 1986. 7 A major problem for revenue estimators is that the revised withholding tables that would 

normally accompany changes individual income taxes are almost never available until long after 

the revenue e~timate is made. Initial estimates of provisions subject to withholding must 

therefore be made assuming that historical patterns continue to hold. This is the fundamental 

reason for Note B in the attached table of revenue estimates (to the effect that the estimates 

assume that the relationship between collections and tax liability is unchanged from current 

law). In fact. if withholding more closely mirrors actual liabilities, an element of interest 

free borrowing from taxpayers will be reduced. 

Based on internal tabulations. aggregate (historical) "rules-of-thumb" for translating 

changes in liability to changes in payments of income taxes are listed below. These ratios show 

the fraction of a change in calendar year liability that will show up as a change in collections 

for the same fiscal year and for the next fiscal year. Users should note that the ratios are 

intended as guides only. that they imply a "normal " pattern of economic activity during the 

course of a year and that they exclude "startup" effects of changes in law (which are often 

quite different). 

Individuals: Proposals to change tax rates 

Proposals to change business income 

Proposals to change minimum taxes: 

Pre-tax reform 

Post-tax reform 

FY FY+I 

(percentages) 

55 45 

37.5 62.5 

0 100 

33 67 

Corporations: Proposals other than minimum tax 60 40 

Proposals to change minimum tax: 

Pre-tax reform 0 I 00 

Post-tax reform 60 40 

8 Source. unpublished OTA data. 9 A Review of the Accuracy of Treasury Revenue Forecasts. 1963-1978. Staff Working Paper. 

Congressional Budget Office. February 198 I. 

REFERENCES 

Kenyon. Daphne. Fedual lncome Ta>.· Deductibility of Stott and Local Taxes. Federal-StateLocal Fiscal Relations: Technical Papers. Volume 1. U.S. Department of the Treasury. 

1986. 

U. S. Department of the Treasury. Office of Tax Analysis. Report to Congress 011 the Capital 

Gains Ta>.· Reductions of 1978. Washington. DC: Government Printing Office. 1985.