Friday December 13, 2013
Government revenue, from taxes, fees, and business revenue, has increased substantially in the 20th century. There have also been remarkable changes in the type of taxes raised and in the relative taxing power by type of government.
Government Revenue in the United States has steadily increased from 7 percent of GDP in 1902 to over 35 percent today.
Government Revenue started out at the beginning of the 20th century at seven percent of Gross Domestic Product (GDP). As you can see from Chart 3.22, the federal share of that revenue was modest, at 2.71 percent of GDP. State revenue was a modest 0.76 percent of GDP and local revenue was 3.56 percent of GDP. But this relationship was not to last. The federal income tax was passed in 1913 and federal revenue rose rapidly in World War I, peaking at 8.4 percent of GDP in 1921 as total government revenue peaked at 14.6 percent of GDP.
For the rest of the 1920s government revenue held at about 11 to 12 percent of GDP, but tax increases at the nadir of the Great Depression increased the government take to 19.1 percent in 1933 (5.78 percent Federal, 4.19 percent State and 9.16 percent Local) and 20.3 percent in 1938 right after the 1937 recession (8.39 percent federal, 5.36 percent State and 6.56 percent Local). The trend was clear; taxing power was moving from the local level up to state governments and to the federal government.
In World War II the government tax take rose sharply again, peaking at 30.2 percent of GDP in 1945. This revenue was split unequally between the levels of government. Federal revenue in 1945 was up to 23.8 percent of GDP, State revenue down to 3.23 percent, and local revenue down to 3.15 percent.
In the post World War II era government revenue fell back initially but then began a slow increase, peaking at 33.1 percent of GDP in the recession year of 1982 and 37.5 percent of GDP in the recession year of 2001. Federal revenue has remained relatively steady, holding between 15 and 20 percent of GDP. But state and local revenue have increased substantially. State revenue broke 8 percent of GDP in the recession year of 1982 and thereafter has fluctuated between 8 and 10 percent of GDP. Local revenue broke 6 percent in 1982 and thereafter has fluctuated between 6 and 8 percent of GDP.
In 1900, government revenues came mainly from ad-valorem taxes. Since World War II government revenue has come overwhelmingly from income-based taxes.
Chart 3.23: Federal, State, Local Revenue in 20th Century
At the beginning of the 20th century, government revenue came almost exclusively from ad-valorem taxes. The federal government obtained its revenue from import tariffs and state and local governments obtained revenue from property taxes.
Things began to change with the passage of the federal income tax in 1913. Income tax collections went to 4.71 percent of GDP in 1921 in the aftermath of World War I, before settling down at about 2 percent of GDP during most of the 1920s and 1930s. Meanwhile ad-valorem taxes went from about 5 to 6 percent of GDP in the early decades of the century to about 10 to 12 percent of GDP, peaking at 14.3 percent of GDP in the depths of the Great Depression in 1933.
Social insurance taxes began seriously in 1937 when FICA taxes, to fund Social Security, started up. Social insurance taxes were 0.70 percent of GDP in the first year of FICA, rising to 1.85 percent by 1940. Income taxes ballooned to 16.0 percent of GDP in the war year of 1944, but settled down to 11 to 12 percent thereafter.
Ad-valorem taxes declined after World War II. They yielded about 10 percent of GDP until about 1960 and then slowly declined to 7.5 percent of GDP by the 2000s. Fees and charges yielded about 0.5 percent of GDP in 1900 and slowly increased to about one percent of GDP by the 1930s. They started to increase again after World War II, reaching 2.5 percent of GDP by the 2000s.
The federal government raises revenue principally from income and social insurance taxes. State government revenue breaks down about equally between income taxes, ad-valorem taxes, and fees and business revenue. Local government revenue is about half ad-valorem taxes and half fees and business revenue.
At the beginning of the 20th century governments at all levels in the United States raised almost all their revenue from ad-valorem taxes: tariffs, sales taxes, and property taxes.
Federal Revenue in 20th Century
Starting in World War I, after the passage of the federal income tax, federal revenue became increasingly dependent upon income taxes. After the passage of the Social Security Act in 1935, the income tax was augmented by social insurance taxes.
State Revenue in 20th Century
States began to get revenues from income taxes in the 1920s and from social insurance taxes beginning in the 1930s. But the principal source of revenue remained ad-valorem taxes. State income taxes began to ramp up in the 1970s, but flattened after 1990. Revenue from fees, employee retirement operations, and lotteries began to represent a large share of revenue in the 1980s and thereafter.
Chart 3.26: Local Revenue in 20th Century
Local revenues are collected principally through ad-valorem taxes. Income taxes remain negligible in most localities. Fees and business income, including employee retirement operations, have steadily increased as a share of revenue throughout the 20th century.
A briefing from usgovernmentrevenue.com. Where you go to get facts about government.
Prepared by Christopher Chantrill.