U.S. Taxes Have Changed A Lot Since 1929

By :: June 20th, 2014

U.S. taxes today bear little resemblance to the taxes collected before World War II. Income and payroll taxes have replaced tariffs and excise taxes at the federal level while property taxes have become less important for state and local governments. And while the feds collected just one-third of all revenue before the war, they now claim two-thirds.

two-charts-3

My Tax Policy Center colleague Lydia Austin and I reported these patterns in a recent Tax Notes article, using data from the Bureau of Economic Analysis on the sources of federal and state and local revenue from 1929 through 2013.

During the 1930s, state and local revenue averaged 9 percent of Gross Domestic Product, with most of that coming from property taxes. The federal government was the junior partner back then: it collected just 5 percent of GDP, less than half from income or payroll taxes.

World War II changed everything. Federal revenues tripled to 15 percent of GDP and income taxes—both individual and corporate—became the dominant source. State and local taxes fell sharply, with property taxes dropping by more than half and sales taxes declining in the face of rationing and other constraints on consumption.

Following the war, federal payroll taxes grew as wages increased and Congress boosted tax rates to support Social Security and, later, Medicare (created in 1965). Payroll taxes now nearly match individual income taxes as the primary source of federal revenue. The relative contribution of corporate income taxes and other sources has dwindled.

Meanwhile, states took responsibility for some local costs, most notably education, leading to greater reliance on income and sales taxes. Sales and property taxes now each account for about a third of state and local revenue and income taxes provide somewhat less.

For more than half a century, total revenues have been remarkably stable.  The federal government typically collects between 17 percent and 18 percent of GDP, while state and local governments raise about half as much. Deviation from those averages mostly occurs only in booms and recessions.

The federal government’s big edge in revenue collections doesn’t mean all that money is spent on federal programs.  The feds transfer hundreds of billions of dollars to the states, which in turn pass lots of money on to local government. The result: roughly equal spending at federal and sub-national levels.

10Comments

  1. PAYROLL TAX RATE 2014  ::  1:59 pm on June 20th, 2014:

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  2. Ralph H  ::  3:58 pm on June 20th, 2014:

    Interesting report. I wish it were possible to view each graph as a whole page. One minor quibble in that half of the payroll tax is paid by the corporation, company or employing organization so in effect the dropoff in overall corporate taxes is not indicative of the “corporate taxes” part of the taxes paid. Also, many more “company” taxes are paid individually because of the structure (LLC, partnership, etc.) We have a very uninformed public and they are likely to assume that companies are paying a lower share of total taxes than they really are.

  3. The Architect  ::  6:38 pm on June 20th, 2014:

    It is clear that corporations are paying less and less of a share of federal revenues as reported by the Urban Institute and the Brookings Institution:

    “Changes in the shares of the various taxes in total federal revenue reflect these historical shifts. The individual income tax has consistently provided nearly half of total federal revenue since 1950, while other revenue sources have waxed and waned. Excise taxes brought in 19 percent of total revenue in 1950 but only about 3 percent in recent years. The share of revenue coming from the corporate income tax dropped from about one-third in the early 1950s to less than a tenth in 2010. In contrast, payroll taxes provided two-fifths of revenue in 2010, four times its one-tenth share in the early 1950s.”

    And this is shown in the first graph above.

    At the same time, regressive payroll taxes and sales taxes have grown as a fraction of federal and state revenues. Payroll taxes are regressive in that the bulk of the tax is paid only on the first $107,000 of income.

  4. Michael Bindner  ::  4:41 am on June 21st, 2014:

    Changing spending is the key and America becoming the world’s policeman since WWII has made it even more so – requiring greater revenues. This has also grown the economy – as has population and the efficiency of automated data processing – my aunt once told me of the army of typists who just completed forms during and after the War. The economic growth in the 20th century means that property taxes may have been nominally the same or growing at a small rate – but GDP boomed – largely due to government spending on roads and the development of air travel. Deregulation gave it yet another push – although the OPEC embargo slowed things briefly. Essentially, its not just taxing and spending that has changed – its the entire economy. (and in small towns, local business and the property taxes they pay have changed to Wal-Mart – who may have exacted concessions to build. This goes to show, bigger is not necessarily better.

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  9. Snodgrass  ::  4:23 pm on June 23rd, 2014:

    “Payroll taxes are regressive in that the bulk of the tax is paid only on the first $107,000 of income.”

    In a word – NOT! This is a common argument which is fatally flawed because it only looks at one side of the tax. Unlike income, sales, property, excise and other taxes, most of which go directly into a general fund used for a variety of expenditures, payroll taxes (FICA and Medicare) go directly into trust funds from which benefits are paid. And if you bother to look at how the payouts work you see that they are EXTREMELY PROGRESSIVE taxes.

    Start with Social Security, which was sold to us as a fair pension for every American worker. The theory was that everyone who paid in would get a reasonably comparable benefit. Let’s take two workers who have the same length of employment, age, etc – all factors the same except one earns $20K/year and the other is at the wage cap of roughly $100K/yr. SSA benefits are PROGRESSIVE – the low wage worker will get roughly $800/month retirement benefit, the high wage worker will get roughly $2400/month retirement benefit. Yes, the high wage worker paid in FIVE TIMES as much in payroll taxes, but he only gets THREE times the benefit.

    But wait, there’s more. SSA income is nontaxable if your income is below a certain threshold. Above that threshold, it becomes partly or mostly taxable (another PROGRESSIVE gotcha). Nearly all high wage workers also save up so they have additional retirement income, which means that they will lose more SSA benefits to the income tax. When you add in these factors, the real-world high wage worker pays in five times the total tax, yet gets back less than 2.5 times the net benefit, so this “fair” system forces him to pay twice as much as the low wage worker for the same benefit. Extending the wage cap only makes this less fair, as you are stealing even more dollars from the high wage worker to subsidize the low wage worker – not a rational person’s definition of regressive.

    Medicare is even worse. Medicare covers certain baseline medical expenses per a preset schedule. As we all have the same number of body parts, there is no significant cost difference between treating a low wage worker for a medical issue and a high wage worker for that same medical issue. Actually, that’s not true. The cost of medical treatment may be higher for a high wage worker, but since many of those workers have saved up to buy decent retiree health insurance (or earned through employer plans, at the cost of receiving less salary during their working careers), they are more likely to utilize their own, better health benefits than to utilize Medicare benefits, thus Medicare pays less than schedule or even pays nothing at all. Even disregarding that factor, the real Medicare program outlay for any given medical issue is likely to be substantially the same regardless of the earnings of the covered worker.

    So if the benefit is the same, the cost should also be the same? HAH! The low wage worker pays $290 per year in required Medicare taxes, the high wage worker five times that ($1,450) if he is at the SSA wage cap mentioned above. HOWEVER…there is no Medicare wage cap. Ever. If (insert your favorite rich person here) makes $10,000,000 in salary this year, he has to pay $145,000 in Medicare taxes. That is 500 TIMES the tax burden of the low wage worker. And this is a regressive tax? Puh-lease!

  10. Ralph H  ::  5:01 pm on June 25th, 2014:

    Correct! It fries me how most people (especially liberals) are so misinformed on this. Given our “progressive” education establishment I should not be surprised. If you repeat the “big lie” often enough people will believe.