Tax Revision Now Expected to Boost Federal Revenues

The new tax law that goes into effect next year now is expected to boost funds for the federal government instead of reaping the same total revenues as the old tax code, according to Reagan Administration and congressional sources.

The new estimates, prepared by the Treasury Department’s Office of Tax Analysis, are a significant factor in the improved outlook for next year’s budget, which is being drafted by the White House for delivery to Congress on Jan. 5.

Loss Projection Reversed

For fiscal 1988, which begins next Oct. 1, new estimates indicate a slight increase in revenues, contrasted with the $17-billion loss projected earlier, according to officials who spoke on condition that they not be identified.

And, during the current fiscal year, according to the projection now being used by the Office of Management and Budget, revenues should rise about $15 billion, instead of the $11 billion estimated by congressional tax analysts in September, sources said. Increases are expected in later years also, they said, although specific figures were not disclosed.

“It now looks like the tax reform bill will be a wash next year instead of a $17-billion loser,” said one budget official; another Administration aide said that “everyone around here breathed a sigh of relief” when the new revenue projections came out.

Among some taxpayers, the new estimates may raise questions about whether a tax increase is actually hidden in the new law. But the changes in the tax code still are expected to provide individual taxpayers with a significant windfall over the next several years, sources said. Earlier estimates showed that individuals would receive income tax cuts totaling about $122 billion over five years, with corporations expected to shoulder an additional tax burden of $120 billion.

Changed Economic Forecasts

The new estimates derive primarily from recent changes in the Administration’s forecast for economic growth and also from further refinements in the estimated effects of tax law changes on business and individual behavior. The government, for example, periodically updates its projections of revenue changes because of the way the new tax law treats real estate shelters, although specifics of these revisions are not available.

However, the projections only represent the best estimates of tax analysts and are highly vulnerable to changes in economic conditions, as well as to the reactions of millions of taxpayers to the new law’s unprecedented sweep.

In addition, the Treasury Department projections follow essentially the same computer model that forms the basis used by congressional tax analysts during the preparation of the bill, although they rely on updated economic assumptions, such as changes in inflation.

But a senior congressional tax aide said that lawmakers have no reason to doubt the accuracy of the new figures. Randy Weiss, deputy chief of staff for the congressional Joint Tax Committee, would not comment on the new Treasury estimates, but he said he had seen the figures and that he would concur with them.

In a lengthy struggle over the tax revision measure, members of Congress tinkered continually to keep the bill officially “revenue neutral” over a five-year period. Tax writers even were forced to make significant changes in the bill because of revenue estimates that were finished only a few days before a House-Senate conference committee approved the final version of the new law.

Loss Still Possible

Despite the new estimates, some private analysts still believe that the bill could prove to be a modest revenue drain for the federal government.

“There are so many uncertainties, it is almost impossible to make an accurate estimate,” said Lawrence A. Kudlow, a former OMB chief economist who is now chief economist at the New York investment firm of Bear, Stearns & Co. “They are undoubtedly going through the process honestly, but I don’t think anybody really knows what the ultimate effects of the tax changes will be.”