Inflation hurts you, but increases government revenue – Marin Independent Journal
Inflation increases government revenue at your expense.
The Congressional Budget Office released its latest budget and economic outlook, revealing that personal income tax collections for the fiscal year ending Sept. 30, measured as a percentage of gross domestic product, are expected to be the highest. highest in US income history. tax, which dates back to 1913.
Total federal tax revenue is expected to reach 19.6% of gross domestic product for only the fourth time in history. It happened in 2000, during the dotcom bubble, and twice during World War II.
One of the reasons for this federal tax windfall is inflation, which drives up asset prices and wages. This translates into higher taxes on capital gains from the sale of assets and higher tax rates for ordinary workers who actually lag behind financially despite higher wages.
The CBO report explains the effect of what it calls “true wafer creep”. Between 2023 and 2032, the CBO predicts that more income will be pushed into higher tax brackets. The Internal Revenue Service adjusts bracket thresholds before the start of the tax year, which means that current-year inflation results in a greater share of income being taxed at higher rates.
“Actual range creep” and other delayed or missing inflation adjustments will cause projected annual revenues as a percentage of GDP to increase by 0.3 percentage points from 2023 to 2032, the CBO calculates.
The same bracket slippage affects state income taxes. California, with the highest income tax in the country, is seeing record revenues flow into the Treasury. Taxpayers who find themselves pushed into a higher tax bracket by increases in the cost of living will not celebrate the state’s record surplus.
The higher wages that result from inflation also come with a bigger bite in payroll taxes.
Along with higher taxes, inflation reduces the purchasing power of consumers. For the government, however, higher prices mean higher sales tax revenue. California has the highest state sales tax in the country, at 7.25%.
The Office of the State Legislative Analyst predicts a 20% revenue increase in 2021-22 from the state’s three largest taxes, personal income tax, sales tax, and income tax. on companies. Inflation, the AJO wrote, “contributed to rapid revenue growth in 2021-22.”
Of course, this is not all good news for governments. The AJO explains that “persistently high inflation would also increase the costs of the government to meet its existing obligations”.
That could lead California lawmakers to seek more tax increases from embattled California residents who are already struggling to make ends meet.
Early in the Biden administration, former Treasury Secretary Lawrence Summers warned that excessive federal spending on emergency relief and infrastructure risked triggering inflation that the Fed would not be able to control unless to induce a painful recession. When inflation began to rise, Federal Reserve and administration officials said it would be “transient” and was due to temporary conditions resulting from the pandemic.
Nobody says that now.
With the US inflation rate at its highest level in 40 years, President Joe Biden is seeing his popularity rating hit new lows. Gallup found that only 16% of Americans say they are “satisfied with the way things are going in the country,” with 83% dissatisfied.
Inflation may only be good for the government until the polls open.
Written by the editorial board of the Southern California News Group.