WSJ – Jan. 18, 2022

Washington Cashes In on Inflation

Individual income tax receipts rose 55% in the first fiscal quarter. Biden spent like a drunken sailor. Now Americans are paying in higher prices.

By The Editorial Board

The country may be upset with inflation, but in many ways political Washington has never had it better. Covid-19 has been the excuse for record government spending and the abuse of regulatory power such as vaccine mandates and an eviction moratorium. And now we learn that tax revenue is rushing into the Treasury even as politicians plead poverty.

That’s the news you haven’t read about last week’s December budget review from the Congressional Budget Office. The budget gnomes report that federal receipts in the first fiscal quarter, from October to December, increased by a remarkable 31%. That’s a cool $248 billion increase to $1.05 trillion for the quarter.

Individual income taxes revenue soared by 55% in the quarter, or $189 billion, to $536 billion. Corporate income taxes rose 44%, or $30 billion, to $99 billion. Payroll taxes and a variety of other receipts, including a 16% increase ($4 billion) in remittances from the Federal Reserve, made up the rest.

This boom for the Beltway reflects the strong growth in nominal GDP. With 7% inflation, nominal GDP is increasing by double digits, which leads to higher nominal profits, wages and salaries. Washington gets the revenue windfall from taxes on those nominal increases even if average wages for workers falls behind inflation, as they did last year by 2.4%, according to the Bureau of Labor Statistics. A 7% rate of inflation is Christmas all year ’round for the federal government. State governments are also reaping revenue windfalls.

CBO says the federal government still had a $377 billion budget deficit in the first fiscal quarter as outlays increased 6%, or $75 billion, to $1.43 trillion. The spending increases came mainly from the pandemic-related transfer payments passed by Congress last March. That included increases of $59 billion in refundable tax credits (mainly the higher child allowance), $21 billion more for food and nutrition (mainly food stamps), and $18 billion more for schools.

The lesson here is that Washington doesn’t need a tax increase. As the economy grows, the revenue will keep flowing, even if the pace of increase slows. Even amid Covid’s Omicron variant surge, the economy is growing smartly and doesn’t need new spending. Everyone who wants a job can get one—or two. The economic problem is inflation, which is hurting workers even as it rewards politicians.

The Wall Street Journal