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The federal government’s budget deficit was $1.8 trillion in fiscal year 2024 (which ended in September), according to preliminary analysis by the Congressional Budget Office (CBO)— lower than the $1.9 trillion deficit CBO forecast in June as taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
revenue came in slightly higher and spending slightly lower than expected. Nonetheless, this marks the third largest deficit ever recorded in nominal terms, after the pandemic deficits of 2020 and 2021, which were $3.1 trillion and $2.8 trillion respectively. The deficit in FY24 was about 6.4 percent of GDP after accounting for recent revisions and expected economic growth, larger than any deficit in records going back to 1930 except the years around World War II, the 2008 financial crisis, and the pandemic.
A major source of the growing deficit is net interest on the public debt, which grew 34 percent to $950 billion in FY24. Interest on the debt is now the second largest federal expenditure after Social Security, which costs $1.5 trillion, surpassing defense spending of $826 billion and Medicare spending of $869 billion. As currently measured, interest paid on the debt in FY24 was about 3.3 percent of GDP, which (after adjustments for comparability) would be the highest since 1992 and nearly the highest in records going back to 1940. Interest on the debt as a share of GDP is set to enter unchartered territory in the new fiscal year, surpassing the high-water mark set in the early 1990s.
Another growing part of the budget, technically scored as spending, is refundable tax credits, including the Affordable Care Act’s health insurance premium tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
, the child credit, and the earned income tax credit. These items grew 16 percent to $199 billion in FY24.
Other major spending categories grew more modestly, though there is considerable uncertainty about the impact of the administration’s policy on student loan forgiveness. CBO notes that the budget totals do not include the latest student loan policy announced in April because it is in litigation, but if finalized, the rules could add more than $100 billion to this year’s deficit.
Overall, CBO estimates spending grew 10 percent in FY24 to $6.8 trillion. At about 23.4 percent of GDP, federal spending in FY24 was above the prior 20-year average of 22.0 percent of GDP.
Federal tax collections grew 11 percent to $4.9 trillion, topping the previous all-time high in 2022. As a share of the economy, federal tax collections reached about 17.1 percent of GDP—higher than the prior 20-year average of 16.6 percent and roughly matching the average over the 20 years prior to the 2017 Tax Cuts and Jobs Act (TCJA). Federal tax collections since the TCJA have averaged about 17 percent of GDP.
The largest source of revenue, individual income taxes, grew 11 percent to $2.4 trillion in FY24, while payroll taxes grew 6 percent to $1.7 trillion. By far the fastest-growing source of revenue was corporate income taxes, which grew 26 percent to $529 billion—$109 billion higher than the prior year and higher than any other year on record. Other receipts grew 12 percent to $255 billion.
As CBO notes, part of the reason both corporate and individual income taxes grew so much in fiscal year 2024 is because tax deadlines were postponed from fiscal year 2023 due to federally declared disaster areas. However, the growth in corporate tax revenues stands out, even after adjusting for the shift. Average corporate tax collections over the last two years reached $474 billion, $49 billion higher than the previous record high of $425 billion in 2022.
As a share of GDP, corporate tax collections reached about 1.8 percent in FY24, the highest level since 2015 and above the 1.7 percent average over the 20 years prior to TCJA. Averaging over the last two years, corporate tax collections have been about 1.7 percent of GDP, roughly matching the pre-TCJA average.
Other measures indicate corporate tax collections are at or above historic levels. Corporate tax collections were 10.8 percent of all federal tax collections in FY24, the highest share since 2008. On average over the last two years, corporate tax collections were 10.1 percent of all federal tax collections—higher than the 10 percent average over the 20 years prior to TCJA.
How can it be that corporate tax collections now meet or exceed the average levels seen before TCJA, when a major part of that law reduced the corporate tax rate from 35 percent to 21 percent?
The main reason is that TCJA not only reduced the corporate tax rate but also substantially broadened the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
. TCJA limited deductions for net interest expense, net operating losses, and fringe benefits, required R&D expenses to be amortized over 5 or 15 years, repealed the domestic production activities deduction, and reformed international taxes. In total, these offsets were estimated by the Joint Committee on Taxation (JCT) to raise more than $1 trillion over a decade, offsetting more than three-quarters of the $1.3 trillion cost of reducing the corporate tax rate.
A related factor is that TCJA reforms changed the timing of tax collections, shifting them out into the future. For example, the policy of 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
, which began phasing out in 2023, shifted forward deductions for capital investment. In 2022, business taxes went up as R&D amortization and a more severe interest limitation took effect. JCT estimated that the TCJA’s business and international reforms would reduce revenue initially, but raise revenue on net by 2023, with a net revenue gain of $21 billion in 2024. We found similar results in our modeling.
Another reason corporate tax collections have grown so much is that TCJA reforms boosted economic growth and profits while encouraging companies to report more profits for tax purposes. The original JCT score was static, so it did not include the impacts of economic growth, but it did estimate how companies would shift reporting of profits to domestic sources for tax purposes. In 2018, CBO estimated TCJA would boost economic growth and the corporate profits tax base considerably, as did we, yet still underestimated just how much corporate tax revenue would grow (CBO predicted corporate tax collections would hit 1.6 percent of GDP this year but they actually hit 1.8 percent). Studies indicate TCJA did in fact strongly boost business investment and economic growth over the last few years.
As discussed in an earlier analysis, federal tax collections as a whole in recent years have surpassed our 2017 projections of both static and dynamic revenues under TCJA, even after accounting for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
. However, as noted in that analysis, there are a multitude of other factors in play that are difficult to disentangle from the effects of TCJA, including intervening developments since TCJA such as higher tariffs and a growing trade war, a pandemic and massive fiscal packages in response, high inflation and efforts by the Federal Reserve to combat it with high interest rates, wars in Europe and the Middle East, a surge in immigration, and other major tax legislation including the CHIPS Act and the Inflation Reduction Act (IRA).
For example, in regard to corporate taxes, the IRA introduced a new corporate alternative minimum tax, a stock buyback tax, and several green energy tax credits, the net revenue effects of which have proven difficult to pin down but likely resulted in a net corporate tax cut. Other factors, such as immigration, may have boosted corporate tax revenue.
In sum, FY24 was another strong year for federal tax collections, particularly corporate tax collections, which by many measures are above historic and projected levels. Some of this strength was anticipated, as it was part of the design of TCJA, including the effects of offsetting revenue raisers, timing shifts, and improved economic growth, while some is due to other intervening factors. Nonetheless, growth in spending, particularly interest on the debt, has swamped much of these gains, producing another year with an alarmingly high deficit.
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