As inflation is on the rise, so are federal tax collections

According to the latest inflation report, prices for almost everything are on the rise. The Consumer Price Index (CPI), which is up 8.3 percent in the past year, has seen many categories go up, including food (11.4%) and energy (23.8%). Although it is not included in the CPI, another indicator of inflation (the Taxpayer Price Index)? According to the Congressional Budget Office (CBO), federal tax collections have increased 23 percent in the past year. Federal tax collections are expected to reach a record of $5 trillion in nominal dollars in the fiscal year 2022 (FY) 2022, which will be about $1 trillion higher than the $4 trillion collected last year.

Federal tax collections as a percentage of GDP are expected to reach a multi-decade-high of around 20.2 percent in FY 2022. This is up from 18.1 per cent last fiscal year, and surpassing the previous peak of 20 per cent set in the dot-com bubble of FY 2000. Federal tax collections are close to the record 20.5 percent of GDP that was set in 1943, during World War II. This year's federal tax collections will surpass the 17.2 percent average in post-war years.

The federal tax collections for the current fiscal year (11 of 12 months) have increased 32 percent, from $1.8 trillion to $2.4 trillion last year. This may be partly due to capital gains from the booming stock and housing market last year. Payroll taxes have increased 14 percent, from $1.2 trillion last year to $1.4 trillion this fiscal year. Corporate taxes have increased 12 percent, from $285 billion up to $319 billion. Other revenues have increased 17 percent, from $281 billion up to $328 billion.

The Tax Cuts and Jobs Act (TCJA), which was enacted in 2017, has caused extreme economic volatility. It is difficult to determine how tax collections were affected by this act. Among other things, the TCJA decreased the corporate tax rate from 35% to 21%. In 2018, the federal corporate and other tax revenues were low, but they have rebounded with inflation and the economy. The average federal tax collection in the five years following the TCJA's enactment is 17.5 percent of GDP. This is higher than the 16.7 per cent forecast by the CBO after its passage, higher that most years prior to the TCJA and higher than any post-war average 17.2 percent.

Notably, current tax collections don't reflect tax changes enacted as part of Inflation Reduction Act. (IRA) Most tax changes go into effect starting January 1, 2023. The IRA is expected to increase gross revenue by approximately $28 billion by 2023. This will be offset by $39 billion in tax credits. This is small in comparison to the budgetary impact of inflation and the rebounding economic environment.

While it is not clear where tax revenue will end up, it depends on inflation and the direction of the economy--and how possible policy changes impact both. These effects are important for policymakers when considering various policy options.

Policymakers should also seriously consider giving tax- and spending-paying taxpayers a break. It is not right to justify more spending by citing record federal tax collections and surging prices. Excessive spending to combat the pandemic is actually driving inflation. We should instead be reducing our dependence on expensive relief programs, such as student loan forgiveness, and ramping up federal tax collections. Taxpayers must demand that all pandemic-related spending stop now that the emergency has ended. They should also request that their tax dollars not be spent as a waste and that they be returned to them.

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