Growing Economy, Not 2017 Tax Act, Is Boosting Corporate Tax Receipts

Corporate tax revenue jumped in 2021, and some proponents of the 2017 Tax Cuts and Jobs Act argue the big tax cuts in the bill deserve credit (wall street journalI, Goodspeed and HassettBut there’s a better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and paid-tax business.

Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast Corporate tax receipts will fall from 1.5 per cent of gross domestic product (GDP) in 2017 to 1.2 per cent in 2018 and 1.3 per cent in 2019 and remain below the 2017 share by 2022 (Figure 1). Real corporate tax receipts fell to 1.0 per cent of GDP in 2018 and to 1.1 per cent in 2019. The onset of the pandemic in early 2020 plunged the economy into recession and kept corporate tax receipts low.

In 2021, corporate tax receipts increased dramatically to 1.7 percent of GDP, higher than the CBO 2018 forecast, For 2022, CBO forecast now Corporate tax receipts will remain strong but fall to 1.6 per cent of GDP, slightly higher than expected in 2018.

The reasons are very clear: in 2021, the economy grew at the fastest rate in three decades and inflation grew at the highest rate in four decades. From beginning of 2020 To early 2021Congress passed several bills designed to reduce the economic and public health impact of the pandemic and help the economy recover.

These measures will pump more than $5 trillion into the economy over their respective 10-year budget horizons, compared to the TCJA. total $1.9 trillion, The Fed’s liberal monetary policy also propelled the economy.

Fiscal stimulus and easy money raised demand for goods and services much faster than production growth, which was restricted by supply constraints related to the pandemic. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite higher compensation because prices of goods respond more quickly to increased demand than to wages.

Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, one percentage point higher than the average of 11.1 percent between 2017 and 2019 (Figure 2).

The tax law also played a role in increasing corporate tax receipts in 2021. But much of this was due to timing changes in reporting earnings. For example, the TCJA accelerated deductions for business investments, reducing taxes early but increasing them later. The 2020 CARES Act allowed the business to use that year’s loss to reduce previous year’s taxes. As a result, some corporations accelerated deductions until 2020 and delayed earnings from 2020 to 2021—all intended to increase or magnify 2020 losses. In addition, corporations had an incentive to accelerate earnings in 2021 and delay cuts from 2021 through 2021 Avoid the proposed tax hike Under the Build Back Better Act

Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the rate of return figures for corporations. As profits increased from 2020 to 2021, the rate of return on assets for non-financial corporations increased from 7.8 percent to 9.4 percent, higher than the 2017 and 2019 average of 8.4 percent. If higher investments boosted U.S. corporate assets during that period, the tax rate of return on pre-corporate assets would have fallen—as it did.

When Congress passed the TCJA in late 2017, official scorekeepers expected corporate tax receipts to decline over the next decade. However, they increased significantly in 2021, after collapsing during the pandemic. Legislation as comprehensive as the TCJA is bound to affect the economy and finances of the federal government, but the TCJA is not a plausible explanation for the recent large increase in corporate tax receipts. Instead, just look at economic recovery, higher prices from supply and demand imbalances, the consequences of pandemic relief legislation and monetary housing.