| Government Finances
by Jurgen Brauer, August 2007
Let us take a look at government finances, from 1960 to 2005. (The data are easily available; just google for “Economic Report of the President” and download the report and its data.) Here are some tidbits. In 1960, federal government receipts amounted to $93.9 billion, $76.5 billion of which came from personal and corporate taxes and taxes on production and imports, with virtually all of the remaining $17.4 billion coming from social insurance contributions. By 2005, federal government receipts had increased to $2,246.80 billion, or $2.25 trillion. $1.37 trillion of that was from tax collections, most of the remainder from social insurance contributions.
Much of the increase in the raw numbers is, of course, due to inflation. To make the numbers comparable over time, I convert them into percentages. Table 1 lists the data in 5-year intervals. The first column computes tax receipt as a percentage of all federal government receipts, 81.5% in 1960. The next column computes social insurance - mostly social security - receipts, 17.0% in 1960. (There is a very small additional percentage of other receipts.) The continuous expansion of the social insurance program, and hence of the requisite tax take, is obvious from the table: by 2005, nearly 40 cents of every dollar in federal receipts came from social insurance program contributions.
Table 2 places government receipts (and outlays) in the context of the economy as a whole. Thus, in 1960, receipts accounted for 17.9% of GDP. In 2005, the figure was nearly unchanged at 17.6%, with fairly little variation for the years in-between. This suggests that the constant debates in Congress over taxes are not primarily about the total tax take, but about distributional issues: that is, whom to tax, rather than how much to tax. While the late Clinton years saw the highest government income, it also saw one of the lowest outlays (due to the strong economy of the mid to late 1990s), so much so that federal government generated a substantial surplus of 2.4% of GDP in 2000. The national defense function took more than half of all federal outlays in 1960, 9.3 percentage points out of the 17.8%. By 2005, this had dropped to about one-fifth. (Even though this appears to be a “small” amount, it accounts for nearly half of the entire world’s defense spending.) The annual federal government budget deficit, and hence the yearly addition to the nation’s debt load, was highest in percentage terms in 1985. As to the total debt itself, the largest addition came during the late Reagan years, the largest reductions during the late Clinton years. Reagan had to deal with a faltering economy in the early 1980s, introduced tax cuts (a double-whammy on tax receipts, at least initially until the economy recovered), and increased military spending to fight the last bits of the Cold War. Clinton, in contrast, could reduce military spending with the end of the Cold War (lower spending) and generally presided over a booming economy (higher tax take). Hence, the surplus/deficit and debt numbers.
Of course, in addition to the federal take, states and local communities take in receipts as well. Table 3 reports the numbers. This is an interesting exercise, because by comparing Tables 2 and 3 we can see that whereas in 1960, state and local tax receipts added 7.6 percentage points to the federal take, for a total of 25.5% government receipts out of overall GDP, by 2005, this had increased to an additional 11.2 percentage points for a total of 28.8% government receipts out of total GDP. The real tax “culprit” is not the federal government at all (whose tax take stayed constant) but the states and local communities. (Moreover, a much larger portion of federal receipts was turned back over to the states in 2005 than in 1960.)
Many people say that economics makes for dull reading; personally, I find an occasional look at the economy’s numbers over a time-span of nearly five decades always entertaining. |