The Penn Wharton Budget Model speaks with Wharton Business Daily on SiriusXM about why taxpayers owed over $500 billion this year.

Households in the U.S. owed more than $500 billion in taxes when they filed their returns this year, which was a jump by two-thirds of the amounts they filed in the years immediately before the pandemic, according to a report by the Penn Wharton Budget Model (PWBM), a nonpartisan research initiative that analyzes the fiscal impact of public policy. That large tax liability is most likely because of a surge in capital gains and other income from financial assets in 2021, the report noted.

Collections of non-withheld taxes (adjusted for inflation) in filing months were just over $300 billion annually in the years before the pandemic, and dipped below $250 billion in 2021, according to the PWBM report. “It’s a spike unlike anything we’ve seen,” said Alexander Arnon, PWBM associate director of policy analysis on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the full podcast above.) Arnon prepared the report under the guidance of Richard Prisinzano, PWBM’s director of policy analysis.

“It does appear to be tied to the unprecedented surge in asset prices and the amount of household wealth held in corporate equities in 2021,” said Arnon. High levels of financial income are historically associated with more tax owed when individuals file their returns, the PWBM report pointed out. “Since households pay taxes on their financial income only when they file their returns, there is a strong positive relationship between the two,” it stated. PWBM estimated that financial income made up nearly one-fifth of adjusted gross income (AGI) in 2021, higher than any year since at least 1990.

“It’s a spike unlike anything we’ve seen. It does appear to be tied to the unprecedented surge in asset prices and the amount of household wealth held in corporate equities in 2021.” — Alexander Arnon

The surge in taxes in the 2021 filing season came entirely 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 extensions of the tax filing deadline in 2020 and 2021. In contrast, payments by check stagnated. “The magnitude of electronic payments in recent years, and especially in 2022, is unprecedented,” the report stated.

“This is all from regular individuals,” said Arnon. Some of it could be from pass-through businesses, but PWBM did not find a significant increase in that. “It does appear to be from people filing their 1040s, paying the tax on their wages, on their dividend and capital gains — not the corporate sector.”

PWBM also found a 40% uptick last year in household wealth, or the value of corporate equities and mutual fund shares owned by households. That was nearly twice as fast as any other year since 1990, which was attributed to the economic recovery and the sharp rise in stock prices.

“Recent years have also seen a substantial increase in the volume of trading by households,” the PWBM report stated. “Rapid asset price appreciation and broadening participation in markets imply an unusually high level of household financial income in 2021, especially capital gains.”

When detailed information on the tax filings is available later, “it is very likely there was a big increase in AGI attributable to capital gains and probably also dividends,” said Arnon. “Coming off the COVID crash, the markets in 2020 bounced back to extraordinarily high levels of asset prices, and that produced a lot of capital gains and just general financial income.”

According to Arnon, the big takeaway from the PWBM analysis is that “the financial markets took off across traditional stocks and across nontraditional investments, and became fairly widespread.” He also expects the surge in taxes to have implications for the federal debt. “This is not going to change the long-term trajectory of federal borrowing, but the Treasury announced [in May] that it had reduced the amount it expects to borrow over the near term. That is at least in part due to the very high level of tax receipts over the last couple of months.”