You know everything that’s wrong: inflation is too high, crime is too widespread, Russia is a barbaric menace. But at least one thing is going well: Federal tax revenues are soaring, offering at least a temporary respite from the usual fiscal gloom.
Total federal tax revenue for 2022 is up 39% from the same period in 2021, according to the Treasury Department. Revenue from personal income tax, the main source, is up 69%. Revenue from business taxes is up 22%. Total tax receipts this year could amount to 19.6% of GDP, which would be the most since the dot-com mania in 2000 swelled government coffers.
Politicians accustomed to blaming each other for myriad problems also impulsively take credit when something good happens. President Biden said “my economic policies have fueled a rapid recovery” that has boosted tax revenue and led to a huge drop in the federal deficit this year. Not so, say Republicans. They argue that Trump’s 2017 tax cuts “led to historically high revenues.” Nonpartisan experts, meanwhile, say don’t believe either side.
Great timing for Biden
Biden, for his part, enjoys lucky timing. He took office as massive stimulus programs produced a record $3.1 trillion deficit in 2020, the last year of the Trump administration. It was only slightly lower, $2.8 trillion, in Biden’s first year in office, in part because Biden signed the $1.9 trillion U.S. bailout package, funded entirely by the government. loan. But there was no stimulus spending in fiscal year 2022, which ends in September, and the Congressional Budget Office projects a deficit of just $1 trillion in 2022, which seems like a big improvement.
Had Biden not signed the ARP, there would have been a sharp decline in the deficit in 2021, his first year in office (and inflation might not have been as bad as it is currently). But Biden hasn’t campaigned to cut the deficit and that has never been a top priority for him. He may also have thought it would be politically more important to show progress on the deficit in 2022, a midterm election year, than the year before. Either way, bragging about a deficit of just $1 trillion is like showing off a clunker that you just turned on again.
Republicans point to the CBO’s latest budget forecast and say it’s proof that the 2017 tax cuts did exactly what Republicans promised: spur so much new economic activity that tax revenue would rise even as rates taxes fell. But the CBO report doesn’t say so at all. The latest predictions mention the 2017 tax law at least 30 times. But to explain the sharp increase in revenue for 2022, it says this: “Total projected revenue increases sharply in 2022 due to the economic recovery, the end of the temporary measures adopted in response to the pandemic and the strength of recoveries. taxes so far this year. (which cannot yet be fully explained). The CBO does not give credit for the tax reduction.
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There is another Republican validation of the 2017 tax cuts. Two economists who served in the Trump administration argued in a May Wall Street Journal article that corporate tax revenues soared in 2021 because after the 2017 tax cuts, U.S. companies recorded more overseas profits at home, paying taxes on those earnings in the U.S. rather than abroad. . American companies also acquired more foreign companies, further increasing their income in the United States. Yet corporate tax revenues fell sharply in the first three years after the tax cut, and only rebounded in 2021, so you have to accept a lag in this supposed causal relationship, and ignore the role COVID-era business aid may have played. .
Three key factors
Tax Policy Center analysts aren’t buying it. In a rebuttal to the Wall Street Journal article, they argued that corporate tax revenues increased in 2021 for three reasons: 1. Real GDP growth in 2021 was 5.5%, the highest since 1984. 2. Inflation reached the highest levels in 40 years. 3. Congress passed $5 trillion in stimulus in 2020 and 2021, and the Federal Reserve provided aggressive monetary stimulus. Stimulus money has boosted demand, allowing companies to raise prices amid supply shortages, which in turn has boosted profits. When corporate profits increase, corporate tax payments also increase.
The 2017 Tax Cuts Act “is not a plausible explanation for the recent surge in corporate tax revenue,” TPC analysts say. “Instead, just look at the economic recovery, rising prices due to supply and demand imbalances, the consequences of pandemic relief legislation and monetary accommodation.”
Those same factors likely apply to personal income tax payments, which also hit a record high in 2021 and are heading even higher this year. Total employment is still below pre-COVID levels, but incomes are growing faster than usual, partly because of inflation and partly because of all the stimulus money that has allowed people to stay employed or prop up laid-off workers until they return to work.
These sorts of murky economic arguments usually go unsettled, with an authoritative explanation that everyone agrees on. Direct cause and effect relationships are difficult to establish, as the CBO acknowledged when it said some of the windfall tax revenues cannot be fully explained. This allows supporters to believe what they want, instead of what might be true. Then the two sides engage in messaging battles where persuasive slogans and pithy slogans matter more than a rational economic argument.
So Democrats can praise Biden for his fiscal responsibility, while Republicans proclaim the trickle-down economics renaissance. At least they’re fighting for something good for once.
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