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Here’s some good news about taxes

Rick Newman
The Exchange
Source: Thinkstock

Taxes get no respect. Everybody hates paying them, and Americans think roughly half their tax money gets wasted. No wonder the Internal Revenue Service is less popular than poison ivy.

As Americans finalize their 2013 income tax returns, however, there’s some upbeat news about taxes. Government tax receipts have soared during the past 18 months, putting Washington on sounder financial footing and easing strains in many state capitals. Higher tax rates have a bit to do with that, but a bigger factor is the improving economy and the 2.9 million people who have gone back to work since the end of 2012.

Federal revenue from individual income taxes in fiscal year 2013 (which ended last September) rose by 16%, to $1.3 trillion. For the first half of fiscal 2014, tax receipts are up another 6% or so, according to the Congressional Budget Office. The agency estimates such revenue will rise by about 5% for all of 2014, and by nearly 12% in 2015.

Tax receipts are going up mainly because income is, as more people bring home a paycheck. Taxable income grew by 5% in 2013 and ought to grow by 4% in 2014, CBO estimates. That’s not gangbuster growth for a so-called recovery, but at least it’s steady.

Tax rates also went up in 2013, putting a bit more money in federal coffers. A temporary cut in payroll taxes expired at the start of last year, which led to a 12% increase in government revenue from social insurance taxes — the automatic deductions that fund Medicare and Social Security.

There was also a hike in the top marginal tax rate, from 36% to 39.6%. That will push the average tax bill of the top 1% of earners up to $525,000 this year--a 7% increase, according to the Tax Policy Center. Next year, the 1% will see taxes rise by another 27%, says the TPC. Overall, the total percentage of income paid in taxes, for all income groups, rose from 11.1% in 2012 to 12% in 2013. That’s likely to keep rising.

Corporate tax receipts are rising, too, as profitability improves and companies begin to grow again. But corporate taxes only account for about 10% of federal revenue, while income tax from individuals accounts for 47%. (Most of the rest comes from social, excise and capital gains taxes.)

The upshot for taxpayers is an annual budget deficit likely to fall from $680 billion in 2013 to $492 billion this year and $469 billion in 2015, according to CBO. That would be a 67% drop in the size of the deficit since 2009, when the government spent a whopping $1.4 trillion more than it raised in revenue — the biggest annual deficit ever.

Problem not solved

Shrinking deficits will allow President Obama to serve the remainder of his second term with less urgency to fix Washington’s finances and more flexibility to pursue other priorities. But the problem is hardly solved. The total national debt (the sum of all annual deficits) now tops a mind-boggling $17 trillion. That’s roughly the size of the whole U.S. economy, a proportion many economists consider worrisome. And on the current course, deficits will start growing again in 2016, as baby boomers begin to swell the Medicare and Social Security rolls.

The picture is rosier in state capitals. State tax revenues plunged during the recession, forcing many states — which aren’t typically allowed to run deficits the way the federal government does — to slash spending on education, public welfare, transportation and many other things. But state tax revenues rose by 6% in 2013, with modest increases likely this year as well.

That may allow a few small luxuries in states that have been mired in austerity. Many states that slashed agency budgets are now adding money back. Governors have proposed pay hikes for teachers in Alabama, Kentucky and West Virginia, and for state troopers in Oklahoma. Workers in Kansas and Maine have already enjoyed tax cuts, with several other states mulling them. That may be the most welcome tax news of all.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.