Which Positions On The Spectrum Would Support Higher Taxes For Increased Government Services?

Download Fiscal FACT No. 415: A Short History of Government Taxing and Spending in the United States

The federal authorities expanded dramatically in the 20th century and has continued growing in the 21st. Between 1900 and 2012, federal government receipts increased from three.0 percent of the economy's output to sixteen.v percent, and federal expenditures rose from 2.7 per centum of economic output to 24.0 percent. Country and local governments have also expanded relative to the residuum of the economy, although not nearly as much as the federal government. Between 1930 and 2012, state and local government receipts grew from viii.0 percent to xiii.0 pct of economic output, while their expenditures rose from 9.1 percent to xiv.viii percent of output. For the overall authorities sector from 1930 to 2012, receipts increased from xi.1 to 26.iv percent of gross domestic production, (GDP) and expenditures rose from 12.1 to 35.6 percentage of Gdp.

This Fiscal Fact provides an overview of these long-term trends.

The Data

The U.Due south. Bureau of Economic Analysis (BEA) supplies annual data going back to 1929 in the National Income and Products Accounts (NIPA) on the receipts and expenditures of the federal government,[one] of state and local governments,[2] and of the overall government sector.[3] BEA also provides annual NIPA data first in 1929 on the U.S. economy's gross domestic production (GDP).[four] These numbers were used to compute total revenues and expenditures relative to the size of the economy for each yr during the menstruation 1930-2012 for the federal authorities,[5] state and local governments, and the overall government sector.[vi]

The federal regime series were extended back to 1900 by cartoon on two additional sources. One is yearly information from the U.Due south. Department of the Treasury on federal receipts and expenditures for 1900-1929.[7] Some other is a set of estimates from the National Agency of Economical Research on U.S. gross national production (GNP) for each year in the period 1900-1929.[8]

The NIPA information does not precisely lucifer the numbers in federal, state, and local budgets because of various methodological differences between how BEA calculates the NIPA data and how state and local government compute their budget numbers. The advantage here of using the NIPA data for 1930-2012 is that it furnishes a long time series of state and local government data, and it reports the numbers for the various levels of government on an internally consistent ground.

As a related point, there is a suspension in the federal series between 1929 and 1930, because the earlier data do not come up from NIPA. (The NIPA and not-NIPA information sets were compared for 1929, and their results are shut but not identical.) Yet, the numbers on both sides of the break tell the same story: the federal government was very small-scale then compared to today.

Looking at Regime Receipts and Expenditures Relative to Economic Output is Useful only Doesn't Tell the Whole Story

Government receipts and expenditures are expressed hither as shares of economic output, because the size of the economic system is an important determinant of the demand for regime services and the ability to support those services. For example, taxes of $100 billion would be a crushing load in a $150 billion economy but much less of a trouble in a $600 billion economy.

However, it should be noted up front that the size of regime is just one of many factors that impact the burdens and benefits of authorities revenue and spending programs. For example, for a given amount of authorities revenue, the public will be better off if the government relies on taxes that are unproblematic rather than circuitous (to lessen taxpayers' paperwork burdens), visible rather than hidden (to let citizens/voters accurately estimate the costs of government services), honestly administered (to uphold fairness and minimize corruption), neutral between consumption and saving (for fairness and to promote growth), and structured to keep marginal tax rates low (to reduce economic distortions that tedious growth). Similarly, on the outlay side, the amount of government spending matters greatly but does not reveal, among other things, whether projects are managed efficiently or wastefully, whether programs generate benefits that exceed their direct and indirect costs, whether the government has prioritized loftier-value projects ahead of low-value ones, and whether spending programs meet broad public needs or direct subsidies to political allies.

The numbers here also do non include most of the costs and benefits of regime rules and regulations. Although there is much doubt about their dollar amounts, the costs are certainly big and ascension. For example, 1 study estimated the regulatory costs imposed by the federal regime were $i.8 trillion in 2013,[9] which would exist well over half the size of, and in add-on to, the federal taxes and other receipts reported in the NIPA data. For an indication of the growth of government rules and regulations, consider that the federal tax lawmaking has mushroomed from 400 pages in 1913 to 73,954 in early 2013.[x]

Federal Government Expenditures Have Increased from nether three Percent of the Economic system in 1900 to 24 Percent of the Economy in 2012

Chart i shows the federal government's receipts and expenditures, expressed as percentages of economic output, from 1900 through 2012. Table 1 provides snapshots at ten-yr intervals.

The nautical chart and table offer several takeaways regarding the long-term path of federal government revenue and spending.

Until the 1930s, the federal regime was extremely pocket-sized compared to the present. The federal authorities once concentrated on a few tasks, such as providing for the national defence force, administering a relatively minor fix of federal laws, and operating a national mail service.[11] Although not shown on the chart or table, the federal government raised most of its money from customs duties and excise taxes up until 1917.[12]
Prior to the 1930s, the federal government during peacetime by and large balanced its budget or ran surpluses. From 1900 to 1916 (just earlier the country's entry into World War I), federal receipts and expenditures both averaged two.one per centum of economic output.
The decade-long Great Depression of the 1930s was a time of rapid growth for federal receipts and expenditures. Although not obvious because of Chart 1's scale, both trends began in the last half of the Hoover administration. On the spending side, the Hoover administration initiated a number of public works and relief projects, and the Roosevelt administration doubled down on that approach with a raft of New Bargain programs. On the revenue side, the Hoover assistants aggressively increased taxes (for instance, hiking the height marginal individual income tax rate from 25 percent to 63 per centum), and the Roosevelt assistants pushed through further increases (for instance, raising the top marginal individual income tax rate to 79 percent.)
Federal spending and federal upkeep deficits typically soar during major wars. Federal expenditures climbed to 20 percent of national output during Earth State of war I—an approximately ten-fold increase from its pre-war level—and hitting 45 percent of Gross domestic product during World State of war Ii. Although federal outlays apace barbarous after World War Ii (to about 14 percent of Gdp), they jumped past more than half with the Korean War (to about 22 percent of Gdp). The failure of federal expenditures to drop sharply after the Korean State of war was probably due in large role to the prolonged Cold War. The federal government has historically enacted steep revenue enhancement increases during major wars, only most past wartime spending has been deficit financed.
Federal receipts and expenditures have been permanently higher since World State of war II than they were earlier that state of war. For case, average federal expenditures during the menstruum 1950 to 2006 exceeded the maximum level of spending at the height of World State of war I.

Tabular array 1 Snapshots of Government Receipts And Expenditures In The United States, As Percent Of Gdp, 1900 To 2012
Year	GDP* (in billions)	Fed Gov't. Receipts, as % of Gross domestic product*	Fed Gov't. Expend, as % of Gdp*	South&Fifty Gov't. Receipts, every bit % of Gdp	S&L Gov't. Expend, every bit % of GDP	Total Gov't. Receipts, as % of Gross domestic product	Total Gov't. Expend, as % of GDP
1900	$19	iii.0%	two.7%
1910	$35	2.0%	2.0%
1920	$91	6.7%	6.2%
1930	$92	3.three%	iii.five%	viii.0%	9.1%	11.ane%	12.ane%
1940	$103	8.three%	10.four%	9.3%	9.four%	16.6%	18.iv%
1950	$300	16.5%	15.8%	6.8%	7.8%	22.three%	22.ii%
1960	$543	17.v%	19.0%	eight.7%	9.6%	25.1%	27.4%
1970	$ane,076	17.5%	21.two%	11.half dozen%	12.6%	27.0%	31.six%
1980	$2,863	18.9%	22.v%	12.4%	12.7%	28.2%	32.two%
1990	$5,980	18.4%	22.4%	12.vi%	13.v%	28.nine%	33.eight%
2000	$10,290	20.3%	eighteen.viii%	13.1%	13.eight%	xxx.8%	xxx.0%
2010	$fourteen,958	16.ane%	26.2%	xiii.9%	xv.9%	26.1%	38.iii%
2012	$16,245	sixteen.5%	24.0%	xiii.0%	14.viii%	26.4%	35.6%
* GNP, non Gross domestic product, for 1900, 1910, and 1920. Annotation: Some expenditures and receipts, notably federal grants-in-aid, are counted in both the Federal and S&L series. The NIPA accounts net them out in the serial for the Full Regime sector. Sources: For 1900-1920, U.S. Bureau of the Census and National Bureau of Economical Inquiry. For 1930-2012, U.S. Bureau of Economical Analysis. Calculations by author.

While much higher than before, federal regime receipts and expenditures stayed within relatively narrow bands from the midpoint of the 20th century until only earlier the Great Recession. During the catamenia 1950-2006, federal receipts averaged 17.9 percent of Gross domestic product, and federal expenditures averaged 20.ix percent of Gdp.[xiii]
After 1950, federal budget deficits became the rule instead of the exception. As tin can be seen in Chart 1, Washington has habitually run deficits since 1950, except for a few years at the end of the 20th century when the federal budget was briefly and barely in surplus.[14] Over the span 1950-2006, federal deficits averaged 3.0 percent of GDP. (Keynesian economics, which advocates government deficits in economically bad years, may be largely responsible for the weakening of budget field of study.)
In the astringent 2007-2009 recession and its aftermath, federal spending climbed college than at whatsoever time since World War 2, and federal revenue dropped to a level last seen in the tardily 1940s. Federal expenditures peaked at 26.2 percent of Gross domestic product in 2010 (5.6 percent points above the 2006 value) and federal receipts bottomed out at xv.6 percent of Gdp in 2009 (2.ix per centum points beneath the 2006 value). In part, these movements reflect the sensitivity of federal spending and revenues to the health of the economic system, combined with the recession's severity and the recovery'southward weakness. However, the increase in spending is greater than would have been expected based on economic factors alone. In 2011 and 2012, federal spending began falling, though it remained high, and federal revenue began rising. Co-ordinate to NIPA data for 2013 (non shown on the nautical chart), total federal spending was 23.three percentage of GDP in the first three quarters of 2013, which is still ii.7 pct points above its 1950-2006 average, while total federal acquirement was eighteen.2 percent of GDP, exceeding its 1950-2006 average.[fifteen]

To summarize this section, federal receipts and expenditures increased several times over relative to the rest of the economy in the get-go half of the 20th century. Their totals then stayed within moderately narrow ranges for almost the adjacent 60 years. With the Great Recession, spending burst out of its prior range, and the deficit rose to an unprecedented level for peacetime. Today, both spending and the arrears remain very loftier simply are declining.

Until 1940, state and local authorities were responsible for most government spending and nerveless almost government revenues, except during major wars

Chart 2 depicts state and local governments' receipts and expenditures, expressed as percentages of GDP, from 1930 through 2012. Additionally, to discern the monies that country and local governments raise themselves, Nautical chart ii as well shows state and local receipts net of federal grants-in-help.

The early on years of the series hold a surprise, at least from the perspective of 2014. State and local government revenues and outlays were once significantly greater than those of the federal government. In 1930, state and local government receipts were 8.0 percent of Gdp to compared 3.3 percent at the federal level, and country and local government outlays were nine.1 of GDP compared to 3.5 per centum for the federal government. To show this visually, Chart 3 direct compares state and local government receipts and expenditures with those that the federal level. (State and local receipts in Nautical chart 3 exclude federal grants-in-help.)

In the first half of the Keen Low, state and local receipts and expenditures increased relative to the overall economy, as shown on Chart two. However, most of that reversed in the 2d half of the 1930s.
The year 1940 was notable considering information technology was the last time country and local authorities revenues and outlays were roughly on a par with those of the federal government.
State and local governments' share of the economy shrank during World War 2, probably because then much of the nation'southward output was conscripted by the federal government for the war endeavour.
After World State of war Two, state and local authorities revenues and outlays began a long climb. By 1975, country and local government receipts were 12.9 percent of Gdp (3.6 per centum points higher than in 1940) and expenditures were 14.1 percent of GDP (4.7 percentage points higher than in 1940).
In the belatedly 1960s and early on 1970s, during the Johnson and Nixon Administrations, federal grants-in-help became a more than important funding source for states and localities. This can be seen in Chart 2 by the rise in the line representing federal grants-in-aid and by the widening of the gap between state and local government receipts with and without that aid. On the expenditures side, the outpouring of federal money has increased the federal government'south influence and induced state and local governments to spend more than otherwise.
Since 1975, state and local government receipts accept moved up and and so down without a clear trend; they were 13.0 percent of GDP in 2012, which is substantially the same as in 1975. (If one excludes federal grants-in-aid and looks at what states and localities collect themselves, receipts accept been close to flat since 1970.) State and local expenditures, however, take been trending upwards, although much more slowly than before. Expenditures peaked in 2009 at sixteen.4 percent of Gross domestic product, with some of that bankrolled by a big influx of federal stimulus spending, and were 14.8 percent of Gdp in 2012 (0.7 per centum signal higher than in 1975.)
State government receipts and expenditures were once pocket-size compared with those of local governments. The NIPA statistics consolidate country and local regime finances and do not show the levels individually. Nonetheless, some Census Bureau surveys report state and local authorities finances separately. The Demography information is used here to augment the NIPA statistics. In 1902, local government revenues and expenditures were approximately 5 times every bit large as those of land governments.[16] In 1932, the local-to-state ratio was approximately iii to 1.[17] In 1970, the local-to-land ratio was most i to i.[18] The Demography Bureau reports that local revenues and expenditures were slightly less than those of state governments in 1991-1992.[19] In 2011, the local-to-state ratio was approximately 0.viii to i.[20] These numbers actually understate the growing influence of state governments over local ones considering state transfers to local governments accept risen from roughly 5 percent of local revenues in 1902 to roughly 30 percent in 2011.

In summary, betwixt 1930 and today, state and local governments grew relative to the overall economic system but not every bit quickly equally the federal government. In 1930, the state and local levels of regime dominated in terms of receipts and expenditures, just now the federal level is ascendant. There has also been a shift from the local level of government to the state level.

From 1930 to 2012, Total Government Revenue Grew from 11.1 Percent of Gdp to 26.4 Per centum of GDP and Total Government Spending Grew from 12.ane Percent of GDP to 35.6 percent of GDP

Chart iv presents the fourth dimension paths of receipts and expenditures for all levels of authorities. The patterns are similar to those for the federal government except the totals are college.[21]

Leaving bated the extraordinary fasten in expenditures during Globe War II, the most noticeable fact is the growth of government. Over the menstruum 1930-2012, government-sector receipts increased from 11.1 percent of Gdp to 26.4 percentage, and government-sector expenditures rose from 12.i percent of Gross domestic product to 35.6 percent, as measured past NIPA methodology. (Come across also Tabular array i.)

Regime revenues and outlays accept non continuously expanded, however. Government expenditures returned in the concluding half of the Clinton administration to approximately where they had been in the 1970s, and authorities revenues similarly returned in the early on role of the Bush-league administration to about their level in the 1970s. Since 2006, though, regime outlays have jumped sharply, claiming over 38 per centum of the nation's economic output in 2009 and 2010. The government sector'due south deficits have also surged and were over 12 percentage of U.S. economic output in 2009 and 2010.

Conclusion

When examining long-term trends, it is natural to wonder what the future holds. The NIPA data but displays past events. However, two considerations suggest that federal taxes and spending, and to a lesser extent state and local taxes and spending, may exist poised to increase substantially.

1 consideration is the Patient Protection and Affordable Care Act, more widely chosen Obamacare, which is notwithstanding in the process of beingness rolled out and which includes an array of major new federal taxes, fees, requirements, and regime assistance programs. Obamacare volition also put upward force per unit area on state government spending.

The other consideration is the aging of the population, which has huge upkeep implications on both the taxation and spending sides, considering the federal government has promised Social Security and Medicare benefits to seniors without setting aside any real avails to redeem those promises. The federal regime also has non funded some of the benefits it promises to federal workers after they retire, and many states and localities take inadequately funded their workers' pensions.

If the government sector expands further, it volition go even more vital than it is already to trim unnecessary or low-return spending programs and to strive for simplicity, economic efficiency, and transparency in tax policy to grow the economy.

[2] U.Due south. Bureau of Economical Assay, National Income and Product Accounts, Tabular array 3.3. Country and Local Government Current Receipts and Expenditures, http://bea.gov/iTable/index_nipa.cfm.

[5] To obtain the federal government's total expenditures, the author imputed two small entries: capital transfer payments for 1929-1936 and net purchases of non-produced assets for 1929-1959.

[6] The writer imputed two small entries to obtain the overall government sector'due south total expenditures: majuscule transfer payments for 1929-1936 and net purchases of not-produced assets for 1929-1959.

[8] The American Business organization Bike: Continuity and Change, Appendix B (Robert J. Gordon ed., University of Chicago Press 1986), http://www.nber.org/data/abc.

[12] Id. at Series Y 352-357, Federal Government Receipts-Authoritative Budget: 1789 to 1939; Series Y 358-373, Internal Acquirement Collections: 1863 to 1970.

[13] Although the expenditures full did not change much, there were some huge compositional shifts, notably a major increase in federal transfer payments and other "entitlements" and a decline in federal defense spending.

[14] Every bit a reminder, the receipts, expenditures, and deficits reported hither are based on NIPA methodology, which differs from the numbers that appear in the federal budget. Co-ordinate to the federal upkeep, the government likewise posted surpluses in 1951, 1956, 1957, 1960, and 1969. Meet Office of Management and Budget, Historical Tables, Budget of the U.S. Government, FY 2014, Table 1.2—Summary of Receipts, Outlays, and Surpluses or Deficits (–) as Percentages of GDP: 1930–2018, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/avails/hist.pdf. However, even if ane looks but at the official federal upkeep, it is still evident that deficits have become the norm and surpluses the exception.

[15] The rebound in receipts is due to both the recovery and the revenue enhancement increases enacted as function of the "fiscal cliff" bargain at the outset of 2013.

[sixteen] See U.South. Census Bureau, Historical Statistics of the United States: Colonial Times to 1970, Series Y 710-735, State Government Acquirement, by Source: 1902 to 1970; Series Y 736-782, Land Regime Expenditure, by Character and Object, by Function, and State Regime Debt: 1902 to 1970; Series Y 796-816, Local Government Revenue, by Source: 1902 to 1970; and, Series Y 817-848, Local Government Expenditure, by Function: 1902 to 1970.

[21] Total government receipts practise not equal those of the federal government plus those of state and local governments, because BEA nets out inter-governmental transfers when computing the NIPA data for the overall government sector. The same is truthful on the expenditures side.