Treasury reaps windfall even without Democrats’ tax increases
Individual income tax receipts are set to reach an all-time high. A special tax targeting companies that hide money in overseas tax havens is bringing in more cash than anticipated. Even companies’ supply chain problems are helping the Treasury.
Though Democrats’ bid to hike taxes by $1 trillion has gone nowhere, the government is suddenly expected to reap that and much more in a windfall of tax payments that is surprising forecasters.
The gusher of money has been overshadowed by the soaring inflation now dominating policy debates in Washington.
But it could prove awkward for Democrats hoping to revive their “reconciliation” spending package, with Republicans now asking why tax increases are necessary when receipts are booming.
Total tax receipts are set to increase this year by 19.5 percent, or $800 billion, according to the nonpartisan Congressional Budget Office, after rising last year by 18 percent.
That would be the biggest back-to-back increases since Harry Truman was president.
“You have to go way, way, way back to the early 1950s to see that kind of growth,” said Mark Booth, a former head of revenue forecasting at CBO.
The money is coming in so quickly the agency now sees Treasury collecting $3.4 trillion more over the next decade than CBO had anticipated.
The surge is giving Republicans a new opportunity to attack Democrats’ plans to up taxes on the wealthy and corporations.
“Revenue has been up sharply,” said Sen. Mike Crapo (R-Idaho), the top Republican on the tax-writing Finance Committee. “Nonetheless, Democrats appear to want to raise taxes more.”
Senate Finance Committee Chair Ron Wyden (D-Ore.) emphasized Democrats’ plans to raise taxes on big companies, which they say are not paying enough.
“After years of corporate tax receipts falling through the floor, it’s rich for Republicans to try to claim victory based on current receipts,” Wyden said. “Corporate revenues are up because mega-corporations are ripping families off — big corporations are reaping the highest profits ever, all while families are scrimping to pay for gas and groceries.”
Revenues are coming in better than expected across the tax system, CBO says.
Individual income taxes, the biggest component of revenues, will jump 28 percent this year, the agency predicts. They’ll reach the highest level since the government began collecting income taxes in 1913.
That’s in large measure because of rising wages, which CBO sees increasing 10 percent thanks in part to inflation.
Taxes on capital gains too are climbing. After jumping last year by 25 percent, forecasters anticipate an additional 11 percent increase this year.
Much of that is because of the boom on Wall Street last year, with the rise of day traders possibly goosing receipts. The agency speculates that more sales are being subject to ordinary income tax rates, rather than reduced capital gains taxes, because more assets are being held for less than a year.
Another factor: Boomers taking money out of retirement accounts. After a 25 percent increase last year, CBO sees taxable money from pensions, annuities and individual retirement accounts growing in 2022 by another 7 percent.
At the same time, it sees more retirees paying taxes on their Social Security benefits as inflation pushes more over the threshold at which checks become taxable. The point at which people begin to owe is not indexed for inflation and hasn’t been changed since the Reagan administration.
But some of the money coming in has CBO scratching its head.
About one-third of the increase in individual income tax payments can’t be explained, the agency says.
That’s partly because even if people ask for an extension in filing their returns, as many wealthy people in particular do, they still have to pay what they owe by the April filing deadline. So CBO can see the money coming into the Treasury but doesn’t yet have access to returns explaining the payments.
“CBO will evaluate the reasons for the discrepancy as more detailed information from tax returns becomes available,” the agency said.
Corporations too are projected to pay more, with payments predicted to grow by 6 percent, amid a projected 10 percent increase in profits.
Some companies’ tax bills are being pushed up by supply chain problems, CBO said. Normally, firms with big inventories are allowed to consider the last item they bought to be the one they just sold.
But when they dig deeply into or completely exhaust their inventories, they must recognize items bought long ago that may have cost them significantly less to purchase. Because the original price was lower, their profit looks bigger, and they owe more in taxes.
Also, provisions created as part of the 2017 tax overhaul targeting companies that stockpile profits in overseas tax havens are bringing in more revenue than forecasters anticipated.
“CBO continued to refine its treatment of income and deductions from foreign corporations and branches, including how it estimates taxes collected on global intangible low-taxed income (GILTI),” the agency said.
The government is now expected to bring in almost $800 billion more in corporate tax payments over a decade than it expected last July — nearly as much as House Democrats were proposing to raise on big companies last year as part of their reconciliation package.
Revenues though are volatile, and lawmakers can’t bank on all of that money materializing.
The stock market has been tanking for months, for example, which means CBO’s capital gains projections may be overstated.
Many people pay quarterly estimated taxes on their capital gains and may now have losses they can use to offset previous gains, thereby reducing or eliminating their tax bills.
And CBO doesn’t project a recession, though many economists now see one on the horizon, which could pummel receipts.
That’s by convention, said Bill Hoagland, a former longtime congressional budget aide. Government budget agencies never predict recessions, he said.
“They don’t want to get into that business,” he said. “They’re worried it would be a self-fulfilling prophecy.”
In its report, CBO noted that, historically, its “largest errors in revenue projections have occurred near economic downturns.”
But some of that money probably will stick around — wages are unlikely to quickly go back down, for example, which means income tax payments should remain elevated.
“The component that’s due to prices rising can probably be counted on,” said Booth.
“Because while inflation should be heading back down, we’re not going to undo the price increases from 2021 and 2022, so that component, on a nominal basis, should remain.”