Washington’s Record Tax Windfall

Biden’s new budget shows the political class is rolling in revenue 

WSJ editorial.

"The Biden Administration on Monday rolled out a fiscal 2023 budget proposal of $5.79 trillion. That’s 31% more than in 2019, the last pre-Covid year, which is staggering enough. But the real budget news that Washington would prefer that Americans not know is that tax revenue is booming.

The money has been rolling in, as the most recent Congressional Budget Office figures show. In the first five months of fiscal 2022 through February, federal receipts climbed a remarkable 26% from a year earlier. That’s $371 billion more—to $1.8 trillion in five months. Individual income taxes rose $271 billion, or 38%, to $975 billion. Corporate income taxes rose 31%, or $28 billion, to $117 billion.

These fiscal 2022 increases follow enormous increases in fiscal 2021, which ended Sept. 30. CBO’s summary for that year shows federal receipts at a record $4.05 trillion, an 18% increase over fiscal 2020 and the largest annual revenue increase in five decades.

Individual income taxes for fiscal 2021 rose $436 billion, or 27%, to reach $2.04 trillion, which CBO notes was a function of “workers with relatively high incomes who face higher tax rates.” Income taxes equalled 9.1% of GDP, well above the 50-year average of 7.9%. Corporate income taxes climbed 75.5%, or $160 billion, to $372 billion. Philosophical question: Does all of this qualify as paying a “fair share” of the tax burden?

The explanation for this gusher is an economy that rebounded strongly after the destructive Covid lockdowns. Revenue also flowed in late in calendar 2021 as some investors cashed out in anticipation of a possible tax increase that so far hasn’t happened. (Though it still might if the White House gets its way; see nearby on its new wealth tax.)

But an under-appreciated reason for the Beltway boom is inflation, which is pushing more taxpayers into higher tax brackets as their nominal incomes rise. Inflation also raises nominal corporate profits. Washington won’t admit it, but inflation is good for the government while it lasts—though it can lead to crushing new deficits when the music stops.

Remember when the political class was claiming that tax cuts had produced an historic decline in federal revenue? The pandemic lockdowns certainly hurt. 

But the nearby chart shows that revenues are back above the modern-era average of 17.3% of the economy, and are heading higher. Revenues hit 18.1% of GDP in fiscal 2021, and this year on present trend will come close to 19%. The Biden budget is underestimating this revenue trend.

The only recent periods when revenues were this high as a share of the economy were the economic boom of the late-1990s, and the roaring inflation of the Jimmy Carter years.

This flood of taxpayer dollars—which CBO estimates will hit $4.53 trillion this year—would not so long ago have been more than adequate to fund Washington’s spending needs. The federal government in fiscal 2019 spent $4.4 trillion. But as CBO blandly notes, spending in 2020 and 2021 “was roughly 50 percent greater than in 2019”—$6.6 trillion in 2020 and $6.8 trillion in 2021.

Spending is falling as a share of the economy now that the pandemic is easing. But it remains well above the modern-era average of 20.8%. In the first five months of this fiscal year, CBO reports outlays fell a mere $201 billion (8%) compared to a year ago.

This decrease is largely thanks to the September end of the government’s enhanced unemployment benefit program, and fewer loans to small businesses. But most of the government’s pandemic programs are rolling merrily along, with a 13% increase ($26 billion) in Medicaid, a 52% increase ($30 billion) in food aid, and a 66% increase ($26 billion) in education spending.

We belabor all of these numbers to show that Washington is doing fine, thank you. The current tax system is throwing off revenue to spend if the politicians would show a modicum of restraint. Yet the Biden Administration is proposing $2.5 trillion in tax increases over 10 years. That would take the tax share of GDP to new records, and it’s the last thing that taxpayers or the economy need."