![]() When Congress passed the TCJA at the end of 2017, official scorekeepers expected corporate tax receipts would decline over the following decade. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen-not increase, as it did. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 20. However, this is inconsistent with the data on rate of return for corporations. Some have suggested that the higher profits were the result of strong business investment. In addition, corporations had an incentive to accelerate income into 2021 and delay deductions until after 2021 to avoid proposed tax increases under the Build Back Better Act. As a result, some corporations accelerated deductions to 2020 and delayed income from 2020 until 2021-all intended to create or increase 2020 losses. The 2020 CARES Act permitted business to use that year’s losses to reduce prior year taxes. For example, the TCJA accelerated deductions for business investments, which reduced taxes early but increased them later. But much of that was due to timing changes in reporting income. Tax legislation also played a role in raising corporate tax receipts in 2021. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 20 (Figure 2). Higher corporate profits translate into higher corporate taxes. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Together, those factors drove prices higher. ![]() The Fed’s accommodative monetary policy also stimulated the economy.įiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. These measures will pump more than $5 trillion into the economy over their respective 10-year budget horizons compared to the TCJA that totaled $1.9 trillion. From early 2020 to early 2021, Congress passed multiple bills designed both to cushion the economic and public health impact of the pandemic and help the economy recover. The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. ![]() ![]() For 2022, CBO now forecasts corporate tax receipts will remain strong but fall to 1.6 percent of GDP, only slightly higher than it predicted in 2018. In 2021, corporate tax receipts grew dramatically to 1.7 percent of GDP, higher than CBO’s 2018 forecast. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low. Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. ![]() Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). ![]()
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