Why don’t we talk more about revenue when we talk about the U.S. budget deficit?
Why don’t we talk more about revenue when we talk about the U.S. budget deficit?
We are pretty accustomed to large budget deficits in this country. But the numbers that the Treasury Department released Friday still shocked many: nearly $1.7 trillion in fiscal year 2023, up 23% from the previous year.
And once some weird accounting is factored in, we have a deficit that effectively doubled year over year.
There are several reasons for that, many of which are complicated and that we’ve talked about before — higher interest rates raising the cost of borrowing, an aging population and rising health care costs leading to higher spending for Social Security and Medicare, and more.
But what’s happening on the revenue side of things?
The vast majority of federal revenue comes from taxes, and the 9% drop in revenues in fiscal year 2023 was mostly due to a drop in individual income taxes, including capital gains.
“And of course, the 2017 tax cut was a real tax cut and has reduced revenue,” said Bill Gale, a senior fellow at The Brookings Institution.
But why is it when we talk about deficits, we often hear a lot more about spending compared to revenues?
“Tax cuts are usually discussed independently from spending or the deficit. … But the conversations really need to be integrated,” because any spending implies the need for future taxes, he said.
For now, the IRS is focusing on just making sure it gets all the taxes owed, especially from wealthier people.
“Every dollar spent auditing these high-income tax individuals would collect more than $12 in additional tax revenue,” said Amy Matsui, the director of income security at the National Women’s Law Center.
The IRS has started cracking down on high-net-worth tax evaders, and the agency said Friday it’s already collected $122 million from about a hundred cases.
“This is more than shaking change out of the couch cushions, but looking at the taxes that are already due and giving the IRS the resources to go after them could take a chunk out of the deficit,” Matsui said.
But, according to Garrett Watson, a senior policy analyst at the Tax Foundation, we need a different long-term solution.
“Even if you’re a fan of changing the way in which we tax the rich, that becomes mathematically very hard to sustain when you’re looking at just the magnitude of the deficit change that we’re looking at over the next 30-plus years,” he said.
Closing that gap, Watson said, will probably require a mix of reduced spending and higher taxes from a broader swath of the economy.
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