The Biden administration on Monday unveiled a $5.79 trillion fiscal year 2023 budget proposal. That’s 31% more than 2019, the last year before Covid, which is amazing enough. But the real budget news Washington would rather not know is that tax revenues are booming.
The money has been pouring in, the latest numbers from the Congressional Budget Office show. In the first five months of fiscal 2022 through February, federal revenue grew a remarkable 26% year over year. That’s $371 billion more — to $1.8 trillion in five months. Individual income taxes increased $271 billion, or 38%, to $975 billion. Corporate taxes increased 31%, or $28 billion, to $117 billion.
These increases in fiscal 2022 follow huge increases in fiscal 2021, which ended September 30. CBO’s summary for this year shows federal revenue of $4.05 trillion, an 18% increase from fiscal 2020 and the largest annual revenue increase in five decades.
Individual income taxes for fiscal 2021 increased $436 billion, or 27%, to $2.04 trillion, which the CBO says is a function of “relatively high-income workers facing higher tax rates.” Income taxes amounted to 9.1% of GDP, well above the 50-year average of 7.9%. Corporate taxes increased 75.5%, or $160 billion, to $372 billion. Philosophical question: Does all this count as a “fair share” of the tax burden?
The explanation for this surge is an economy that has rebounded strongly from the devastating Covid lockdowns. Proceeds also flowed in at the end of calendar year 2021 as some investors cashed out in anticipation of a possible tax hike, which has not happened so far. (Though it’s still possible if the White House has its way; see nearby about his new wealth tax.)
But an underestimated reason for the Beltway boom is inflation, which pushes more taxpayers into higher tax brackets as their nominal incomes rise. Inflation also increases nominal corporate profits. Washington won’t admit it, but inflation is good for government as long as it lasts — though it can lead to staggering new deficits when the music stops.
Remember when the political class claimed tax cuts led to an historic fall in federal revenue? The pandemic lockdowns are certainly hurting.
But the chart below shows that revenue is back above the economy’s modern average of 17.3% and continues to rise. Revenue reached 18.1% of GDP in fiscal 2021, and this year, according to the current trend, it will reach almost 19%. The Biden budget underestimates this sales trend.
The only recent periods when earnings have been this high relative to the economy were the late 1990s economic boom and the raging inflation of the Jimmy Carter years.
That flood of taxpayer money — which the CBO estimates will reach $4.53 trillion this year — would not long ago have been more than enough to meet Washington’s spending needs. The federal government spent $4.4 trillion in fiscal 2019. But as CBO mildly notes, spending in 2020 and 2021 was “roughly 50 percent higher than 2019” — $6.6 trillion in 2020 and $6.8 trillion in 2021.
Spending as a share of the economy is falling now as the pandemic eases. But it remains well above the modern average of 20.8%. In the first five months of this fiscal year, spending fell by just $201 billion (8%) year over year, according to the CBO.
This decline is largely due to the government’s expanded unemployment benefit program at the end of September and reduced lending to small businesses. But most of the government’s pandemic programs are buoyant, with a 13 percent increase ($26 billion) in Medicaid, a 52 percent increase ($30 billion) in food aid, and a 66 percent increase ($26 billion). US dollars) in education spending.
We’re working on all these numbers to show Washington is doing fine, thank you. The current tax system wastes revenue that could be spent if politicians showed some restraint. But the Biden administration is proposing $2.5 trillion in tax increases over 10 years. That would push the tax share of GDP to new records, and that’s the last thing taxpayers or the economy need.
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Appeared in the print edition of March 29, 2022.
https://www.wsj.com/articles/washingtons-record-tax-windfall-white-house-budget-congressional-budget-office-revenues-11648506018 Washington’s Record Tax Windfall – WSJ