Federal tax collections are likely to reach a record high in the current fiscal year, rising as much as $1 trillion since the prev...
Federal tax collections are likely to reach a record high in the current fiscal year, rising as much as $1 trillion since the previous period.
According to an analysis from the Tax Foundation published last week, data released by the Congressional Budget Office indicate a 23% increase in tax collections between fiscal years 2021 and 2022, with the latter ending on September 30. The government is slated to collect roughly $5 trillion in nominal revenue — an increase from $4 trillion in fiscal year 2021, which was also a record amount.
“Taxes on income are not good for the economy, not good for incentives to work, save, and invest,” Tax Foundation Vice President Will McBride explained during an interview with The Daily Wire. “Tax burdens on income going up present another challenge for the economy.”
Indeed, federal tax collections are projected to reach 20.2% of gross domestic product — the highest level in modern history, during which collections have averaged 17.2% of economic output.
“1943 is the last time we had federal tax collections at this level or above this level … the second-highest level would have been during the dot-com bubble in 2000,” McBride added. “The rate of increase in tax collections — we haven’t seen that either since World War II.”
Over the five years since former President Donald Trump signed the Tax Cuts and Jobs Act into law, federal tax collections had averaged 17.5% of output. The increase in collections does not account for the Inflation Reduction Act, which largely enters into effect in 2023 and is forecast to increase gross revenue by $28 billion next year.
As a result of robust stock market and housing performance in 2021, individual income taxes — which increased 32%, from $1.8 trillion in the last fiscal year to $2.4 trillion — surged more than any other revenue source.
“We rely very heavily in this country, and certainly compared to other developed countries, on income taxes at the federal level,” McBride said. “We have an extremely progressive individual income tax, probably the most progressive income tax in the developed world, so we rely very heavily on high income earners. Their incomes fluctuate quite a lot — for instance, due to capital gains and the housing market.”
The Dow Jones Industrial Average, however, has plummeted more than 20% since the beginning of 2022. McBride postulated that tax collections will therefore decrease next year due to the poor stock market performance. A decline in corporate profits, which had been soaring amid the economic recovery, could also diminish tax collections in the future.
The United States economy is struggling under a variety of disruptions — including labor shortages, supply chain bottlenecks, and the Russian invasion of Ukraine — all of which have contributed to soaring inflationary pressures. Price levels between August 2021 and August 2022 rose 8.3%, according to data from the Bureau of Labor Statistics, marking a slight moderation from the two preceding months even as core inflation continued to increase.
In response to the elevated price levels, officials at the Federal Reserve raised the target federal funds rate 0.75% last week, mirroring identical rate hikes in June and July. The moves are meant to discourage inflation by dampening economic activity through increased costs of borrowing money.
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