Federal tax receipts are booming, driven by inflation

Total receipts this year will be $4.8 trillion or 19.6 percent of the country’s economy, CBO said, which would be the most since 2000 when the Treasury Department swam in cash flung out by the dotcom bubble. .

That’s a major reason why the agency sees the government’s budget deficit shrink to $1 trillion this year.

The estimate comes as Democrats work to revive their big ticket “reconciliation plans” with Senate Leader Chuck Schumer (DN.Y.) sitting with Sen. Joe Manchin (DW.Va.) on a proposal that could potentially impose $1 trillion in new taxes targeting corporations and the wealthy.

The revenue increase is the result of rising inflation, CBO said, as well as the ongoing recovery from the coronavirus pandemic.

The government raises nominal wages, which rise thanks to inflation, even if most people’s wages fall when rising prices are taken into account.

Much, but not all, of the tax code is indexed for inflation, and only imperfectly. Adjustments to things like where individual tax brackets go into effect will be made in August, so as to rule out subsequent increases in inflation.

“The Internal Revenue Service sets the adjustments to those income thresholds before the start of the tax year, meaning the adjustments are based on the previous year’s inflation,” the report said. “Because of that slowdown, a larger portion of income could be taxed at higher rates during periods of high inflation.”

Taxes paid by individuals — the government’s largest source of revenue — are driving the increases, CBO said, and this year’s revenue is expected to rise 28 percent. As a share of GDP, they would be the highest since the introduction of the individual income tax in 1913.

Capital gains are also jumping, reflecting last year’s run-up in the stock market, clocking in at $262 billion — an increase of 11.5 percent. That comes on the heels of last year’s 25 percent increase.

A combination of higher profits and the effects of inflation are also pushing up corporate taxes, which CBO now sees grow 6 percent to $372 billion.

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