Federal Tax Revenue Remains Strong, According to the CBO

The Congressional Budget Office (CBO) released an update to its budget and economic projections, reflecting changing economic conditions and new legislation.

The report shows that U.S. federal revenues are projected to remain at or above historic levels. In 2022, revenues reached a two‐​decade high of 19.6 percent of gross domestic product (GDP). At a time of historically high revenues, it should be clear to policymakers that uncontrolled spending is the primary culprit for persistent deficits and debt.

The strong revenue growth—both in recent years and projected—does not support claims by some that the 2017 Tax Cuts and Jobs Act caused the current budget imbalance. Instead, Figure 1 shows that corporate revenues declined only temporarily in the year following the tax cuts, but income and payroll taxes increased. In the following years, revenues continued to grow with the economy as businesses expanded and workers received wage increases. In 2022, income tax revenue was 32 percent higher than CBO projected following the 2017 tax cuts, in April 2018. Similarly, payroll and corporate tax revenue outpaced the estimate by 6 percent and 20 percent, respectively.

The nominal revenue numbers clearly show the effects of inflation and other pandemic impacts, as income taxes spiked in 2021 and 2022. But not all the increase is a mirage. Figure 2 shows revenues are currently well above the historic average when shown as a percent of GDP, which also increases with inflation. The dotted line represents the pre‐​2017 50‐​year historical revenue average of 17.4 percent of GDP.

Since 2021, federal revenue as a percent of the economy has been well above the historic average and is estimated by CBO to remain elevated through the next decade. Even in the years directly after the 2017 tax cuts, revenue did not fall below the previous decade’s average of 16.3 percent of GDP.

The projections in Figures 1 and 2 assume Congress does not change current law, in which significant pieces of the 2017 tax cuts expire at the end of 2025, automatically raising taxes on most individuals and businesses by about $2.7 trillion through 2032. In the years before the scheduled tax increases, revenues are still estimated to remain at or above the historic average.

These projections also tell the cautionary tale that tax increases alone cannot cover the rising cost of federal spending. Even after the 2017 tax cuts expire, CBO projects the annual deficit to reach $2.7 trillion in 2033. President Biden’s 2023 budget proposed about $1.7 trillion in new taxes over ten years, about half of which would come from raising the corporate tax rate from 21 percent to 28 percent. Setting aside the economic cost of raising taxes on American employers, even the Biden Administration’s politically unrealistic proposed tax increases would only cover about 8 percent of the CBO’s projected 10‐​year deficit.

A lot of the analysis of the CBO release will rightly focus on the updated spending estimates and the accompanying report on when the U.S. government will no longer be able to pay its full obligations under the debt limit.

Much of the associated coverage will miss that CBO projections and recent historical data show that U.S. federal revenues are at levels not seen in more than two decades and are projected to remain at or above historical trends. Given these data, it should be clear that the deficit is not the product of indiscriminate tax cuts but instead the result of unchecked spending growth.