How Much of $4 Trillion a Year in Tax Receipts Will Government Give Up?

The Federal Reserve Bank of St. Louis puts current federal tax receipts at $1 trillion a quarter, or about $4 trillion a year. Due to the spread of coronavirus, some of this will be pushed out a year from 2020 due to rescue plans. Some might be forgiven. Some will never be paid because businesses and individuals will be unable to do so. This, in turn, means the federal government’s total receipts will be far below the $4 trillion, which means the deficit could rise much more rapidly than expected.

The Congressional Budget Office calculates the $4 trillion figure as the total of individual, corporate and payroll taxes. Of this, 84% comes for payroll taxes and individual taxes. So the risk to government receipts is primarily the extent to which individual taxes take a sharp dive.

If unemployment rises sharply throughout the year, the question is how high it will go. The range of estimates is 10% to 20% of the population. Based on the current unemployment rate of 3.5%, that means annual taxes from individual tax receipts could drop by between $200 billion to $350 billion. The Trump administration’s deficit in its proposed budget is already $1 trillion.

Making the matter worse, the rescue package for the deeply damaged U.S. economy is proposed at $2 trillion. Most of that is federal outlay. The deficit could rise by close to that number, although not all the $2 trillion would be paid out in 2020. But most of it would be. The deficit could balloon to over $3 trillion, with lower receipts, the effects of the bailout and the $1 trillion loss in the current budget proposal.

[nativounit]

The federal deficit is currently $23.3 trillion. That figure could early rise to $25 trillion, and with it, debt service per year would jump in the future. The only mitigating factor is that some individual taxes will be deferred and not forgiven.

One advantage the federal government has is that it can raise money at interest rates as low as 1%. While the deficit would rise sharply, annual debt service on the deficit would not. Will the government borrow as much as $3 trillion in the next year? It probably has no choice.

[recirclink id=657341][wallst_email_signup]