Many Republicans believe revenues next year will come in substantially higher than the Congressional Budget Office (CBO) is predicting, allowing for a significantly larger tax cut than Congress is currently contemplating. Last year CBO underestimated federal revenues by $72 billion.

CBO Director June O'Neill argues that everyone underestimated revenues last year, and CBO's deficit forecasts were close to those made by the Office of Management and Budget and private forecasters.

Nevertheless, CBO's estimate of future revenues does seem to be unusually conservative. CBO is predicting that revenues will grow more slowly than gross domestic product (GDP) over the next decade (see figure). Generally, because our tax system is progressive, revenues grow faster than GDP.

• Throughout the postwar period revenues grew by 0.6 percent per year more than GDP.

• In the last 10 years, revenues grew even faster -- by 0.9 percent more per year than GDP.

• If CBO's GDP estimate is correct, one would ordinarily expect between 5.2 and 5.5 percent growth in future revenues, rather than the 4.5 percent growth that is projected.

O'Neill does not give a satisfactory explanation for why revenues are expected to grow so much more slowly than they have grown historically. There is bound to be a recession some time in the next decade and this will cause revenue growth to slow. But the impact of past recessions is already incorporated into the historical data on growth of actual revenues. So it seems odd for the CBO in effect to predict a future recession will have an impact on revenues much greater than those in the past.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 6, 1998.