Everybody wants credit for booming tax revenue
You know everything that’s going wrong: Inflation is too high, crime is too widespread, Russia is a barbaric menace. But at least one thing is going right: Federal tax revenue is soaring, providing at least a temporary respite to the usual fiscal gloom.
Total federal tax receipts for 2022 are up 39% from the same period in 2021, according to the Treasury Department. Revenue from individual income taxes, the biggest source, is up 69%. Revenue from business taxes is up 22%. Total tax revenue 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 says “my economic policies powered a rapid recovery” that boosted tax revenue and led to a huge decline in this year’s federal deficit. Not so, Republicans say. They argue that the 2017 Trump tax cuts “led to historically high revenues.” Nonpartisan experts, meanwhile, say not to believe either side.
Excellent timing for Biden
Biden, for his part, is a beneficiary of lucky timing. He came into office as massive stimulus programs produced a record deficit of $3.1 trillion in 2020, the last year of the Trump administration. It was only slightly smaller, $2.8 trillion, during Biden’s first year in office, in part because Biden signed the $1.9 trillion American Rescue Plan, financed entirely by borrowing. But there’s been no stimulus spending in fiscal 2022, which ends in September, and the Congressional Budget Office forecasts a mere $1 trillion deficit in 2022, which sounds like a big improvement.
If Biden hadn’t signed the ARP, there would have been a big drop in the deficit in 2021, his first year in office (and inflation might not have turned out quite as bad as it is now). But Biden didn’t campaign on reducing the deficit and it’s never been a top priority for him. He may also have figured it would be more politically important to show progress on the deficit in 2022, a midterm election year, than the year prior. At any rate, bragging about a deficit of only $1 trillion is like showing off a jalopy you just got running again.
Republicans point to the CBO’s latest budget forecast and say it’s proof the 2017 tax cuts did exactly what Republicans promised: stimulate so much new economic activity that tax receipts would go up even as tax rates went down. But the CBO report doesn’t say that at all. The latest forecast mentions the 2017 tax law at least 30 times. But to explain the big boost in 2022 revenue, it says this: “Total projected revenues rise sharply in 2022 because of the economic recovery, the end of temporary provisions enacted in response to the pandemic, and the strength in tax collections so far this year (which cannot yet be fully explained).” CBO gives no credit to the tax cut.
There’s an alternative Republican validation of the 2017 tax cuts. Two economists who served in the Trump administration argued in a May Wall Street Journal piece that corporate tax receipts boomed in 2021 because after the 2017 tax cuts, U.S. businesses booked more overseas profit at home, paying taxes on that income in the U.S. rather than overseas. American companies also acquired more foreign firms, boosting their U.S. income further. Yet corporate tax revenue dropped sharply during the first three years after the tax cut, and only rebounded in 2021, so you have to accept a lag in this supposed cause-effect relationship, and discount the role COVID-era aid to businesses may have played.
Three key factors
Analysts at the Tax Policy Center aren’t buying it. In a rebuttal to the Wall Street Journal piece, they argued that corporate tax revenue surged in 2021 for three reasons: 1. Real GDP growth in 2021 was 5.5%, the highest since 1984. 2. Inflation hit the highest levels in 40 years. 3. Congress passed $5 trillion worth of stimulus in 2020 and 2021, plus the Federal Reserve provided aggressive monetary stimulus. The stimulus money sent demand surging, which allowed firms to raise prices amid supply shortages, which in turn boosted profits. When corporate profits rise, corporate tax payments rise, too.
The 2017 tax-cut law “is not a plausible explanation for the large recent increase in corporate tax receipts,” the TPC analysts say. “Instead, just look to the economic recovery, higher prices from supply and demand imbalances, the aftermath of pandemic relief legislation, and monetary accommodation.”
Those same factors likely apply to individual income tax payments, which also hit a record in 2021 and are headed even higher this year. Total employment is still below pre-COVID levels, but incomes are growing faster than usual, in part because of inflation and in part because of all the stimulus money that kept people employed or tided over laid-off workers until they went back to work.
These types of arcane economic arguments don’t usually get settled, with one authoritative explanation everybody agrees upon. Direct cause-and-effect relationships are hard to establish, as the CBO acknowledged when it said some of the windfall tax revenue can’t be fully explained. This allows partisans to believe what they want, instead of what might actually be true. Then the two parties wage messaging battles where persuasive slogans and pithy taglines matter more than a rational economic argument.
So Democrats can praise Biden for his fiscal responsibility, while Republicans proclaim the rebirth of trickle-down economics. At least they’re fighting over something good, for once.