Who Pays the Federal Government’s Bills?

In conservative circles, one often hears about the ways in which high taxes are unfairly strangling the rich and businesses, while everyone else enjoys a free ride on their tab. They often argue that the Obama administration has implemented some egregiously expropriatory taxes on them. In fact, the government draws less tax (in proportion to the size of the overall economy) from corporations and from income taxes (the primary tax on affluent people’s incomes) than it did over most of the postwar era.

The stacked area plot below shows how the composition and overall level of federal taxes have changed since the mid-1930s. It measures the ratio of government receipts to GDP, which approximates the size of government taxes relative to the overall size of national economic output (a rough proxy for the overall size of the economy). Data come from the US Office of Management and Budget.1

federalincomesources

 

After World War II, the government increased taxes dramatically, with government revenues rising from around 5% of GDP in the mid-1930s to just over 18% by 1952. Public sector revenues more than tripled.

In the early-1950s, governments drew about 42% of its revenue from individual income taxes, and about 32% from corporate income taxes. What I term payroll taxes involve taxes related to “Social Insurances and Retirement” programs, like Social Security and Medicare taxes. Excisetaxes are taxes on particular products, like alcohol, cigarrettes, and gasoline. During the mid-20th century, many governments also drew considerable money from trade tariffs.

Beginning in 1953, corporate income taxes decreased in proportion to the government’s overall revenues. Often, this was instituted by implementing and altering rules related to tax deductions. The first cut in corporate taxes is believed to be related to the Eisenhower’s passage of more generous capital depreciation rules. These types of corporate tax deductions have been implemented almost continuously throughout the postwar era.

WIth the passage of time, government revenues were increasingly funded through payroll taxes, while excise and corporate income taxes were eliminated. By 2000, about 50% of government revenues were drawn from personal income taxes, 10% from corporate taxes, 32% from payroll taxes, and 4% from excise taxes. The burden of funding government operations made a substantial shift away from corporate sources, and towards household sources.

Under the George W. Bush administration, personal taxes were cut along with overall government revenues, and the lost revenue was covered by public borrowing. By 2004, income taxes fell to 43% of total revenues, while payroll taxes, which were not reduced, rose to 40% of total government revenues.

What can we glean from these findings? First, business taxes seem much more modest than they’ve been throughout most of the postwar era. The government has been reducing taxes on corporations for decades. Whatever arguments might be made about the high tax rates levied on corporations, the federal government’s low overall take from this source suggests that tax deductions make the actual amount paid rather low. Insofar as personal taxes are concerned, top income tax rates have decreased considerably over decades (I’ll post on that another day), while the take from payroll taxes has risen considerably. Payroll taxes fall harder on lower income earners, as payroll taxes are only levied on the first $118,000 that someone earns.

Overall, taxes on corporations are very low by modern historical standards. Personal income taxes are not particularly high by historical standards either.


  1. Office of Management and Budget (2015) “Table 2.3: Receipts by Source as Percentages of GDP: 1934-2020” Accessed June 5, 2015.https://www.whitehouse.gov/omb/budget/Historicals