Thursday, August 11, 2022

Tax revenues are on the moon; why double the IRS?

Astounding fiscal factoid:

Since just before the onset of the Covid-19 crisis, federal revenues on a rolling 12-month basis have increased 36%, with the lion's share of this coming from surging individual income tax payments. 

Federal revenues now stand at 19.4% of GDP, which is way above the average (17.4%) since 1968. This is the highest reading since June 2001, when it was 19.8%. In the past 5 decades or so, the highest reading for federal revenues as a percent of GDP was 20.2%, in September 2000. (Recall that the federal government enjoyed a brief period of budget surpluses from 1998 through 2001, thanks to booming tax receipts and slow growth in spending.)  

The federal budget would be in surplus today, if not for the continued and profligate spending on the part of Congress. Instead, the deficit in the 12 months ended last month was $962 billion. 

Yet despite these facts, the Democrats want to increase taxes on corporations, double the number of employees at the IRS, and increase spending by $760 billion, lavishing money on, among other things, green energy boondoggles which have virtually no chance of making any measurable change in global temperatures. 

Reason is in short supply in Washington these days.

What this means is that fiscal policy will become yet more of a headwind to growth, and living standards will struggle to increase, all the while Washington acquires more and more power over our lives.

Chart #1

Chart #1 shows monthly federal revenues (white) and the 12-month rolling average of those revenues (red). Revenues have increased from a monthly average of $296.5 billion to $402.7 billion. 

Over the same period and on a rolling 12-month total basis, individual income taxes have increased by a staggering 48%, rising from $1.76 trillion to now $2.6 trillion.

Combine that enormously increased tax burden with the income lost to inflation in the past two years, and the average worker has paid an enormous price for the Covid shutdowns. It's really sickening to contemplate. And yet Washington wants still more.

Aloha




On our 6-mile walk around the Kapalua area (northwest Maui) we came upon this charming photo-op. 


Sunday, August 7, 2022

Inflation Reduction Act is bad for the economy


Over the years I've learned that whenever politicians pass laws that impact the economy, the results, with few exceptions, end up being not only perverse but opposite to the supposed aims of the legislation. The Inflation Reduction Act currently being considered is a perfect example of this. It won't do anything to lower inflation, but it will do lots of things to weaken the economy.

If you want a good analysis of why the Inflation Reduction Act is harmful, just read this analysis by Casey B. Mulligan, a great economist associated with The Committee to Unleash Prosperity. I'm a proud supporter of CTUP, by the way. Reading this analysis is a great way to understand how the real world works.

A short summary:

The Inflation Reduction Act contains multiple negative incentives on work and investment that will have substantial negative effects on the U.S. economy. These negative effects include 1) the reduced incentives for businesses to invest because of the corporate tax increase and the increased tax rate on certain investments (carried interest); 2) the negative effects on work due to the expansions in health care subsidies under the Affordable Care Act - subsidies not tied to working; 3) the negative impact on new drug development due to new federal price controls on the pharmaceutical industry.