INSIGHTS: HOW HAS FEDERAL REVENUE CHANGED OVER TIME?
By Guest Columnist Scott Greenberg:
Analyst, The Tax Foundation
In 2015, the vast majority of federal revenue came from just two sources: individual income taxes and payroll taxes. But it wasn’t always that way. In fact, the sources of federal revenue have changed dramatically over the course of the last century.
Let’s travel back one hundred years, to 1915. Back then, the main sources of federal revenue were very different. Almost half of all federal revenue came from excise taxes, such as taxes on liquor and tobacco. Another 30.1 percent of federal revenue came from customs duties, or tariffs, on imported foreign goods.
As the table above shows, income taxes made up only a small portion of federal revenue in 1915. Individual income taxes accounted for 5.9 percent of federal revenue, while corporate income taxes accounted for 5.6 percent. At the time, both taxes were relatively low: the individual income tax had a top rate of 7 percent, while the top corporate tax rate was 1 percent.
Over the next century, the main sources of federal revenue in 1915 faded away. The U.S. followed suit as nations around the world gradually eliminated most of their customs duties. And Congress left most federal excise tax rates steady, causing overall excise tax revenues to grow more slowly than the size of the federal government.
Meanwhile, several other federal taxes grew more prominent:
Corporate income taxes briefly became the largest source of federal revenue after the Revenue Act of 1942 raised the top corporate rate to 40 percent.
Individual income taxes were also transformed by the Revenue Act of 1942 – from a narrow levy on wealthy Americans to a broad-based tax on 50 million households. Because of these changes, individual income taxes rose from 13.6 percent of federal revenues in 1940 to 45 percent of revenues in 1944, becoming the largest source of federal revenue.
Payroll taxes rose substantially throughout the 20th century, following the enactment and expansion of Social Security and Medicare.
Over the next ten years, the Congressional Budget Office projects that individual income taxes will continue to grow as a source of federal revenue, while corporate income taxes will become less important. As for a century from now? No one really knows how different the sources of federal revenue will be then.
ON THE ECONOMY: STEADY AS SHE GOES
By John Dunham:
Managing Partner, John Dunham & Associates
When you have completed what you thought you had to do, and your blood’s depleted to the point of stable glue. Then you’ll get along. Then you’ll get along. Steady as she goes, so steady as she goes. This 2006 song, written by Jack White and Brendon Benson was the debut single by the American rock band The Raconteurs, and steady as she goes is a good way to describe Federal tax revenues in the post war period.
In fact, as a percentage of GDP, total Federal tax revenues have fluctuated between 15 and 20 percent of GDP ever since the end of World War II. They reached a high of 19.69 percent in 2000, the last year of the Clinton Administration, and hit a low of 14.6 percent in 2009 following the last recession. In fact, even under the Obama Administration, which has been accused of significantly increasing taxes, revenues as a percentage of GDP have risen only to 17.4 percent of GDP, just slightly above the post war average of 16.8 percent.
While revenues have been fairly constant, outlays have not, rising from a low of 13.1 percent of GDP in 1951 to a high of 24.4 percent in 2009. The overall trend has been for revenues to rise at about 0.8 percent per year (as a percentage of GDP), and outlays to increase at about 7 percent a year (again as a percentage of GDP). This has led to an increasing Federal deficit, and a whopping $17.8 trillion net Federal debt outstanding. Since 1950, there have only been 9 years where the Federal government ran a surplus, and the average deficit since the last surplus in 2001 has been 4.4 percent of GDP.
This massive deficit is hardly sustainable. The current level of debt is already over 100 percent of all the country’s annual production, and if current trends were to continue it would reach 200 percent of GDP by 2035. The Greek economy collapsed with a debt to GDP of about 180 percent of GDP, so this is an ominous trend. True, America is not Greece, but a fiscal system that has debt doubling every 20 years or so is unsustainable for any borrower.
Since historically the Federal government simply cannot increase the tax burden to much more than 20 percent of GDP, and since as Herb Stein’ rule says, something that is unsustainable will stop, the American public needs to begin to understand that Federal spending (of which about 70 percent is transfer payments), will need to change. In fact, even if all Federal spending except for transfer payments had been eliminated, the country would still have run a deficit in 4 of the past 10 years.
So if the government cannot increase taxes except at the margins, and is priced out of the debt markets it will have to rely on other means to come up with the money necessary to continue to spend at 25 percent of GDP.
One way that Greece has been using to sell assets. Fortunately, the Federal government has a huge asset base, much of which is underutilized. The government owns over 900,000 separate buildings with over 3 billion sq. ft. of space. Of these at least 45,000 are underutilized. It owns either the land or mineral rights for over 2.515 billion acres of land and off-shore area, a larger total area than the entire nation of Canada. In addition the government owns 261.5 million ounces of gold, and innumerable works of art. It also holds a huge amount of outstanding loans including a student loan portfolio worth nearly $1.0 trillion. This does not even take into account equipment and other assets like ships, tanks, telescopes, satellites, etc. When the assets of the Federal government are included, the debt does not look as bad. It’s like having a large mortgage on a home with a huge amount of equity.
But many of these assets are illiquid or are national treasures that could never be sold to wipe out the Federal debt. This leaves one last way that the government can continue to spend beyond its means – simply printing money. This is something that the government has been doing in droves while at the same time borrowing. Printing money leads to inflation, and inflation has already eaten away 90 percent of the value of a dollar since 1950. And while measured inflation has been tame recently, there is nothing to stop massive hyper-inflation from impacting the United States. The US inflation rate rose to more than 10 percent annually 7 times since 1776, generally when the country was at war, but also in the late 1790s and later 1970s. As with debt, printing money has its limits as well, particularly in an integrated world economy. Over time, high inflation will price the US out of world markets, leading to an inability to reasonably import necessary items like metals, oil and even bananas.
The simple truth is that American’s can no longer rely on the Federal government to provide them with spending money, food, health care, and pensions. Congress can eliminate the debt ceiling, but markets will not. Over time, the Federal government will be required to pay more to service debt – a vicious circle that will only increase the debt faster.
Steady as she goes is a good thing if you are in a relationship or if you are sailing a ship, even in the case of Federal revenues. But rising spending in the face of steady revenues presents a problem, and it’s a problem that will come home to roost sooner than most people may want to believe.
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