DANIEL VAUGHAN: Tax revenue plunges while Americans fight inflation

 May 15, 2023

As we continue hurtling toward a potential debt ceiling default, there's a growing panic in the government. Part of this freakout is undoubtedly political, with officials playing it up to aid Democrats in the White House. But there's also a growing fear because tax revenues are "plunging," according to reports. The drop in tax revenue is happening with another backup of ever-increasing prices - where inflation continues to run wild.

Combining both sides of this coin gives you a picture of an American consumer under intense distress. People still have to pay taxes, buy groceries, and survive. Official government reports from the Bureau of Labor Statistics show inflation is cooling down. But as one markets analyst put it, "Inflation cools, but no one believes it."

And what's freaking out the government the most is the surge in tax revenue it saw in 2021, when Americans started seeing pay raises and stock market gains, are gone. The average taxpayer has had two years of inflation eat away at every corner of their paycheck. Now, the economy is on the brink of recession.

Tax revenues plummet.

On the drop in tax revenue, The Wall Street Journal reported that the "expected annual gusher of tax-season payments didn't flood into the Treasury. When the Congressional Budget Office analyzed tax collections for the current fiscal year through April, the tally fell about $250 billion short of predictions from just a few months ago."

That drop in tax revenue is partially why the Treasury believes that government funds will run dry in early June. Typically, the government would expect to get enough monthly tax revenue to continue moving along. But this drop in tax revenue is hitting it hard, raising the real possibility the Federal Government won't make it to mid-June when the subsequent tax payments hit the books.

There are a variety of reasons for the drop in tax revenue. For one, Americans aren't seeing the large gains in stocks like last year. But that's not the only reason; inflation remains the primary issue for most Americans. The WSJ continued:

Inflation likely had an effect, too, said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, a fiscal watchdog group. Tax brackets get adjusted for inflation but with a lag. As a result, the surge in incomes and wages associated with higher inflation generated a one-time sudden tax increase in 2021 that will moderate over time. That likely affected business taxes, too, he said, because companies deducted pre-inflation costs and received post-inflation revenue, boosting profits before those effects reversed.

Beyond all the government reporting that inflation is cooling, you get a radically different story. Prices are still increasing for goods and services that Americans need every day.

Companies continue to raise prices.

In an interview, Kroger's CEO EO Rodney McMullen said he was "surprised by how openly some company executives have been discussing price increases on conference calls. In the past, 'they would not be as aggressive in talking about it publicly ... They are being much more transparent than what I have historically seen.'"

More broadly, the Wall Street Journal examined earnings reports across the economy and found, "Companies continue to jack up prices on a range of goods from diapers to handbags—and some are even bragging about it to investors as a sign of brand strength. In some cases, the increases more than cover the hit from higher raw material, labor and other costs, fattening profit margins."

Put all of this together, and you get a weakening consumer. One survey of consumer sentiment showed it plunged to the lowest point in the last six months. Americans are growing more concerned about recession and the weakness of their local and regional banks. Analysts are concerned that if the American consumer continues in this mindset, it'll be a self-fulfilling prophecy of a recession.

Americans see a recession on the horizon.

The US economy is heavily dependent on a consumer that spends money. If the consumer starts pulling back, spending less, or saving more, it hurts the broader economy. None of this is new if you've lived in this economic environment.

That brings us back to the top: inflation is cooling, but no one believes it. That's also leading us into a debt ceiling fight where the average consumer is struggling and worried about the future. Everyone expects Congress and the White House to figure out the debt ceiling and pass something. What's growing less certain is whether many in the government are prepared for an economic downturn.

The American consumer is already showing signs of weakness. The average person has dealt with extreme financial pressures since the pandemic. It's been an intense three years. There's little sign of relief in the broader economy at the moment. Americans are still searching for serious budgetary discipline in their leaders.

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