Friday afternoon, the Treasury Department reported that, despite a growing economy and low unemployment, the federal deficit shot up by $320 billion in fiscal year 2023. That’s unusual. But what’s really bizarre is why the deficit exploded.
According to the report, overall spending actually dropped by 2% compared with 2022 as the COVID-19 spending splurge abated.
What drove up the deficit this year was a sudden and completely unexpected 9% drop in tax revenues. Not only did revenues come up hundreds of billions lower than last year, but they were well below what everybody expected them to be.
At the start of the year, the Treasury Department and the Office of Management and Budget projected revenues for fiscal 2023 at around $4.7 trillion. The Congressional Budget Office figured it would be $4.8 trillion.
The actual amount: $4.4 trillion.
In other words, there’s between $300 billion and $400 billion worth of missing tax revenues.
Keep in mind that those forecasts assumed that nothing changed in terms of policy over the course of the year, and all were based on economic projections that turned out, if anything, to be pessimistic.
The CBO, for example, figured the nation’s GDP would be $26.3 trillion by the middle of this year. The actual number was $27.1 trillion. It projected an unemployment rate of 4.6%. The actual number was 3.6%. It expected there to be 154 million jobs; there were 155.5 million. The CBO figured inflation would be running at 4.1%. It was 3.7%.
In a normal world, a better-than-expected economy would result in more revenues for the federal government, not less.
Keep in mind, too, that it’s exceedingly rare for tax revenues to drop from one year to the next. In fact, it’s happened only eight times since 1960 – always around an economic downturn – and the average decline was just 4.7%. Even when the COVID lockdowns caused a massive recession, revenues only dipped by 1.2% in 2020. (Revenues plunged nearly 17% during the financial crisis.)
It’s also worth noting that revenues continued to climb after the Kennedy, Reagan and Trump pro-growth tax cuts went into effect.
Then there’s the fact that Joe Biden raised taxes in 2023. The Inflation Reduction Act, which Biden signed in August 2022, included $60 billion in tax hikes in 2023, including a new tax on business income, an enormous increase in IRS funding to increase audits, an excise tax on stock buybacks, more taxes on natural gas, oil, and coal, and the phase-out of some Trump business tax cuts.
Yet, despite the hike in business taxes, corporate income tax revenue dropped by $5.3 billion in 2023. Individual income taxes plunged by $456 billion.
What happened? Where did this $300 billion go? And why isn’t this front-page news?
Don’t get us wrong, we’d like to see the tax burden on Americans sharply decline – on a permanent basis – commensurate with a monumental reduction in the size and scope of the federal government.
But that’s not what happened this year. The federal government is still tremendously bloated – spending in 2023 will be 43% higher than it was the year before COVID-19. The national debt now tops $33 trillion. Social Security and Medicare are racing toward insolvency. Biden is pushing Congress for another $100 billion to finance the never-ending war in Ukraine and provide aid to Israel.
Did the Biden administration overcount revenues in the past two years to paper over the colossal spending increases? Is the White House goosing employment and other economic data today to make the economy look better than it is? Is Biden’s budget team just hopelessly incompetent?
Preston Bashers of the Heritage Foundation speculates that the shortfall could be the result of a sharp drop in capital gains tax revenues, the explosion in “green” tax credits, and other factors.
Somebody in the Biden administration should be made to explain what happened.
In the meantime, we’re now deeper in debt than ever. Way to go Brandon.
— Written by the I&I Editorial Board