Uncle Sam is making a lot of money. But he doesn’t quite know why.
Driven by a post-pandemic boom, federal revenue will reach levels not seen in two decades, with taxes paid by individuals driving much of the surge.
That spectacular news, combined with less pandemic-related spending, is helping tame the budget deficit, which will come in around only $1 trillion this year. Over each of the last two years the government ended up roughly $3 trillion in the red.
The Congressional Budget Office said the surge comes chiefly in individual income tax receipts, which account for 10.6% of gross domestic product this year. That’s the highest rate in the 109-year history of the tax, according to The Wall Street Journal.
But there’s a mystery about what’s happening.
CBO analysts say a third of the rise is due to economic growth, and another third is from the end of pandemic-era payroll tax deferrals, which means those payments from the past two years are coming in now.
But the other third “cannot yet be explained.”
“Corporate tax collections were larger in 2021 and early 2022 than can be fully explained by currently available data on business activity for those years,” CBO’s analysts wrote. “The factors that contributed to the unexplained strength in receipts will not become fully apparent until information from tax returns becomes available over the next two years.”
The rest of the balance sheet looks normal.
Payroll taxes, measured as a percentage of GDP, are static, while corporate income taxes are down just a smidgen.
Brian Riedl, senior fellow at the Manhattan Institute, said the superlative revenue numbers probably won’t last.
“As the economic chaos of the past three years fades away, I would expect revenues to revert back to historical trends,” he said.
He said wages aren’t rising, but the extra money must be coming from somewhere. And the answer might be Uncle Sam himself, who pumped out trillions to bolster the economy in the equivalent of a government mass-level marketing scheme.
“This may ultimately reflect massive Federal Reserve and congressional stimulus pushing up consumer spending, which in turn raises taxable business income,” Mr. Riedl said. “Essentially, we may be just taxing all the stimulus money that was received and spent.”
The government is expected to collect $4.826 trillion this year, according to CBO’s projections, or 19.6% of GDP. That’s up roughly $800 billion compared to 2021, when total revenue was 18.1% of GDP.
Over the last 50 years it’s averaged just 17.3% of America’s economic output. CBO projects revenue will dip to 18.6% next year, then stabilize later this decade at about 18.1%.
The extra money has helped keep a cap on what otherwise would look like a runaway deficit.
If revenue had come in at 2021 levels, the $1 trillion deficit would have been about 30% worse. If revenue had matched the 50-year average, the deficit would have been 50% worse.
Democrats say President Biden deserves credit for the good numbers, pointing to a $1.9 trillion infusion the president and the Democrat-led Congress pumped into the economy in early 2021, delivering cash to state and local governments, businesses and consumers.
For some Republicans, and particularly former President Trump’s economic team, the new numbers are confirmation that their 2017 tax cuts have paid off, delivering a supercharged economy that’s running so hot that a major cut to the corporate income tax rate not only hasn’t sapped the government of money, but is actually producing more.
The 2017 law reduced personal income tax rates and also slashed the corporate income tax rate from 35% down to 21%, and front-loaded deductions for new equipment purchases. Critics had said the government would be starved of cash, but instead corporate tax takes are higher than ever.
“Now the evidence is in. Our critics were wrong, and the economic data have met or even exceeded our predictions,” Tyler Goodspeed and Kevin Hassett wrote in a Wall Street Journal piece last month, even before the CBO numbers were released.
The two men, both of whom led the White House Council of Economic Advisers under Mr. Trump, said median household incomes rose, business investment surged and corporations booked more profits here in the U.S. rather than overseas.
That was critical to the federal revenue picture because, because, as they wrote, “21% of a positive number is much larger than 35% of zero.”
Analysts at the Tax Policy Center and American Enterprise Institute, though, say corporate tax revenue is being powered by the strong economy, inflation and government coronavirus spending, all of which were good for companies’ bottom line. And that means it was good for the feds.
“Higher corporate profits translate into higher corporate taxes,” wrote William G. Gale and Steven M. Rosenthal of the Tax Policy Center, and Kyle Pomerleau of the American Enterprise Institute.
They said the argument that the 2017 law spurred more business investment is “inconsistent” with rate of return data, which should have fallen if investment was boosting corporate assets.
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