Don't Mess With Taxes

With inflation at historic levels, U.S. families are re-examining their budgets.

Uncle Sam recently did the same with his money, or rather the Congressional Budget Office (CBO) did. What this federal agency within the government's legislative branch found was surprising.

The word that the CBO actually used was unexplained in connection with the robust growth of tax collections.

Unexplained income tax revenue: "Tax collections in both 2020 and 2021 were larger than the currently available data on economic activity would suggest," according to the CBO report "The Budget and Economic Outlook: 2022 to 2032" issued on May 24.

"That unexplained gap has widened in 2022," added the CBO.

What is clear is the specific source of the money.

"Individual income taxes are the largest source of federal revenues," notes the CBO, which referenced the report table reproduces below. Over the past 50 years, individual taxes have contributed an average of 46 percent of annual revenues, equal to 8 percent of gross domestic product (GDP), added the report.

Next in line are payroll taxes, mainly for Social Security and Medicare Part A (the Hospital Insurance program). They accounted for an average of 34 percent of annual revenues, equal to 6 percent of GDP, over the last five decades.

Finally, CBO cites corporate income taxes, which have provided 10 percent of revenues, or an average of 1.8 percent of GDP, and all other sources combined which have brought in about 9 percent of revenues, or 1.6 percent of GDP.

Expected income tax variations: Individual income tax receipts have fluctuated significantly over the past 50 years, noted the CBO report. Those fluctuations, which show no consistent trend over time, are attributable to changes in laws and in the economy.

Which brings up back to the unexplained increase in tax collections for 2020 and 2021.

That also brings us to this weekend's Saturday Shout Outs.

The CBO report obviously gets the first mention.

But if you don't want to spend your weekend digging though the dense 150 pages, I recommend the following items that highlight the key CBO findings. Those added shout outs go to —

• Jay Heflin's item for the Eide Bailly tax blog, 2022 federal individual income tax receipts likely largest on record;
• Erica York's and Garrett Watson's Three Takeaways from the New Congressional Budget Office Outlook for the Tax Foundation;
• Peter Cohn's analysis for CQ Roll Call on how Unexplained tax revenue growth vexes budget scorekeepers; and
• Brian Faler's Politico piece on Federal tax receipts boom, powered by inflation.

Inflation factors: Not to spoil Faler's article, but he does note the report's citing of inflation, which kicked off this post.

To close this circle, I'll leave you with one more excerpt from the CBO report on that economic issue's effect on tax revenue:

"The income thresholds for the various tax rate brackets in the individual income tax are indexed to increase with inflation (as measured by the chained consumer price index published by the Bureau of Labor Statistics). If income grows faster than prices — as CBO projects it will in each year from 2023 to 2032 — more income is pushed into higher tax brackets, a process known as real bracket creep. In addition, the Internal Revenue Service sets the adjustments to those income thresholds before the start of the tax year, which means that the adjustments are based on inflation in the previous year. Because of that lag, a larger share of income may be taxed at higher rates during periods of high inflation."

The upshot, adds the report, is that the individual income tax system is not indexed for real growth, that is, growth beyond the rate of inflation.

Happy weekend economic figures reading. I'll join you, but after I first focus on some numbers posted on various Major League Baseball game scoreboards.

You also might find these items of interest:

• IRS hiking tax-deductible driving rates by 4¢ on July 1
• 2022 inflation adjustments series Part 1: Income tax brackets
• IRS announces 2023 inflation hikes for HDHPs, tax-favored HSAs

Advertisements