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The latest inflation report confirms that prices for just about everything are continuing to rise, with the consumer price index (CPI) up 8.3% from a year ago and many categories even higher, including food (11.4%) and energy (23.8%). Although not part of the CPI, another measure of inflation (call it the taxpayers’ price index?) is also on the rise: Federal tax revenues rose 23% during last year, according to the latest data from the Congressional Budget Office (CBO). At the current pace, federal tax collections will hit an all-time high of about $5 trillion in nominal dollars for the 2022 fiscal year ending September 30, about $1 trillion more than the $4 trillion of recovery dollars last year (also a record) .
As a percentage of GDP, federal tax revenue is on track to hit a multi-decade high of about 20.2% in fiscal year 2022, up from 18.1% in the prior fiscal year and topping the last peak of 20% set during the dotcom bubble in 2022. Fiscal year 2000. Federal tax revenues are approaching the record high of 20.5% of GDP set in 1943 during World War II. Compared to the average postwar federal tax revenue of 17.2 percent of GDP, revenue this year is expected to exceed that level by 3 percentage points.
In terms of federal tax collections in the year-to-date (11 out of 12 months), personal income tax collections grew the most, up 32% from from $1.8 trillion last year to $2.4 trillion this year. This may be partly explained by the capital gains resulting from the boom in the stock and real estate markets last year. Payroll taxes rose 14% from $1.2 trillion last year to $1.4 trillion this year, while corporate taxes rose 12% from $285 billion to $319 billion. billions of dollars. Other income increased 17% from $281 billion to $328 billion.
The extreme economic volatility of recent years makes it difficult to assess the impact of the Tax Cuts and Jobs Act (TCJA) on tax revenues enacted in 2017. Among other changes, the TCJA reduced the tax rate for companies from 35% to 21%. Corporate and other federal tax revenues were relatively weak in 2018 during the first year of the pandemic, but have since rebounded along with the economy and inflation. Average federal tax revenue in the five years following enactment of the TCJA is approximately 17.5% of GDP, higher than the 16.7% projected by the CBO after its enactment, higher than most years. before the TCJA and above the post-war average of 17.2. percent.
Note that current tax collections do not reflect tax changes passed last month as part of the Inflation Reduction Act (IRA), which primarily takes effect from January 1, 2023. We estimate that the IRAs will increase gross income by approximately $28 billion in 2023, offset by $39 billion in tax credits, which is small compared to the fiscal effects of inflation and economic recovery.
It remains to be seen where tax revenues will go from here, but it clearly depends on the direction of the economy and inflation – and how potential policy changes will affect both. This highlights the need for policy makers to at least try to account for these effects when weighing various policy trade-offs.
In addition, policymakers should seriously consider giving taxpayers a break, both in terms of taxes and expenditures. Record federal tax revenue on top of soaring prices—essentially an additional tax on inflation paid by everyone who uses dollars—should not be used to justify more spending. Indeed, overspending in response to the pandemic is fueling inflation, and rather than stepping up costly relief programs (e.g., student loan forgiveness), we should scale them back. Taxpayers should demand that pandemic-related emergency spending stop now that the pandemic-related emergency is over and that their tax dollars be used more wisely or returned to them.
