Your taxes are standing between the US and economic doom
Your tax payments are preventing the US from teetering over a fiscal cliff into a severe recession—and the difficulty of predicting them gave policymakers less warning than usual for potential debt default that is now ominously close.
Tax revenue from non-withheld tax payments—checks sent in before April 15, not automatically taken out of paychecks—was down 37% from last year as of May 12, said Mark Booth, a financial consultant who used to be a tax forecaster for the Congressional Budget Office.
This decline in tax revenue could get larger as the IRS completes its processing of tax returns in the coming days and weeks, Booth warned.
However, the Treasury Department and other US government agencies failed to accurately predict the extent of tax revenue decline in 2023.
The failure to forecast the decrease is partially because 2022 tax receipts were around 50% higher than normal, thanks to more capital gains tax payments during a booming stock market, and increased income taxes from workers whose wages were rising.
Why did revenue forecasters miss this year’s changes?
In 2022, many investors suffered losses, which are tax deductible, or didn’t see the value of their investments increase as much as they had the year before.
“People were selling their stock and getting less in the way of gains than they had the year before when the stock market was going up,” Booth said. “There’s smaller gains or sometimes a loss.”
Congressional Budget Office director Phillip Swagel noted in a press release on May 1st that not only were the CBO’s original estimates for tax revenue off base, but that the IRS had already processed tax returns more rapidly than last year, when the pandemic had slowed down the IRS’ staff. On the other hand, tax refunds were down compared to 2022, which helps keep cash in government coffers.
Booth says most of the miscalculation in tax payments is due to not being able to track the stock trades of US households who make $200,000 or more, which is about 6% of US households. Brokerages report stock trades to the IRS at the end of each year, but the compliance burden would be too high for them to report in real-time so that the CBO and other forecasters could be more accurate.
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