According to a report by the Penn Wharton Budget Model, households in the United States owed more than $500 billion in taxes when they filed their tax returns this year, an increase of two-thirds of the amounts they owed in the years immediately preceding Pandemic (PWBM), a bipartisan research initiative analyzing the fiscal impact of public policies. This high tax liability is most likely due to an increase in capital gains and other income from financial assets in 2021, the report said.
Fiscal month unwithheld tax collections (adjusted for inflation) totaled just over $300 billion per year in the years leading up to the pandemic and fell below $250 billion in 2021, according to the PWBM report. “This is a spike like we’ve never seen before,” said Alexander Arnon, PWBM’s associate director of policy analysis, on the Wharton Business Daily radio show, which airs on SiriusXM. (Listen to the full podcast above.) Arnon produced the report under the direction of Richard Prisinzano, director of policy analysis at PWBM.
“It appears to be related to the unprecedented rise in asset prices and the amount of household wealth held in company stocks in 2021,” Arnon said. High financial returns have historically been associated with more taxes owed when individuals file their tax returns, the PWBM report pointed out. “Because households pay taxes on their financial income only when they file their tax return, there is a strong positive relationship between the two,” it said. PWBM estimated that financial income accounted for nearly a fifth of adjusted gross income (AGI) in 2021, more than any year since at least 1990.
“It’s a top, unlike anything we’ve seen. It appears to be related to the unprecedented rise in asset prices and the amount of household wealth held in company stocks in 2021.” —Alexander Arnon
The increase in taxes in the 2021 filing season came solely from taxpayers who paid by electronic funds transfer, PWBM concluded, based on how those payments were made. Electronic payments and payments by check show strikingly different patterns after 2020. Electronic payments rose well above pre-pandemic norms, accounting for tax return deadline extensions in 2020 and 2021. In contrast, payments by check have stagnated. “The scale of electronic payments in recent years, and especially in 2022, is unprecedented,” the report said.
“It’s all from normal people,” Arnon said. Some of that might come from pass-through companies, but PWBM hasn’t seen a significant increase in that. “It seems to be coming from people filing their 1040s who pay taxes on their wages, on their dividends and on their capital gains – not the corporate sector.”
PWBM also found a 40% increase in household wealth, or the value of company stocks and mutual fund shares owned by households, over the past year. That was almost twice as fast as any year since 1990, thanks to the economic recovery and the sharp rise in stock prices.
“Household trade volumes have also increased significantly in recent years,” says the PWBM report. “The rapid rise in asset prices and widening market participation imply unusually high household financial income in 2021, particularly capital gains.”
If detailed information on the tax returns is later available, “it’s very likely that there was a large increase in AGI, driven by capital gains and probably dividends as well,” Arnon said. “After the COVID crash, markets rebounded to exceptionally high levels in asset prices in 2020 and that resulted in many capital gains and just general financial earnings.”
According to Arnon, the big takeaway from the PWBM analysis is that “financial markets in both traditional stocks and non-traditional assets took off and became quite widespread.” He also expects the tax hike to have an impact on government debt. “This will not change the long-term trajectory of the federal debt, however, the Treasury Department announced [in May] that it had reduced the amount it expected to borrow in the short term. This is at least partly due to the very high tax revenues of the last few months.”
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