A short history of higher taxes

A short history of higher taxes

There is always a lot of rhetoric on Tax Day. Later I will comment on some of today’s rhetoric. In this post I will instead focus on some basic facts that are not earth-shattering, but provide some important historic context for the current tax and spending debate.

Let’s start by looking at just the total amount of taxes collected by the Federal government over time, adjusting for inflation.

total federal taxes (real)

You can see taxes growing fairly steadily over time. The various bumps are a combination of changes in law and economic cycles. Still, even given those factors, the total amount of inflation-adjusted dollars going to the federal government has clearly climbed over time. In real terms, government’s take has gotten bigger.

Some argue that we should instead measure total federal taxes as a share of the economy. This presumes that as the economy gets bigger, government “should” get bigger proportionately. I disagree with that view. Some things that government does clearly are related to the size of our population, or are related to other measures of society’s income or wealth. I do not buy that principle as a general matter. Still, let’s look at that perspective.

total federal taxes share of gdp

You can see that the federal government’s take from the economy has remained roughly constant since the end of World War II. The flat line is at 18.1%, and shows that, on average over the past 50 years, Uncle Sam takes about 18.1% out of every dollar earned in America. This graph makes the policy changes and economic fluctuations easier to see. For instance, you can see the effects of the 1993 reconciliation bill (which raised taxes), plus the economic growth of the 90s, ending in the stock market “bubble” (I use that term loosely) in 1999 and 2000 with phenomenally high capital gains revenues, followed by the stock market decline and recession in 2001 and 2002, combined with the effects of the 2001 tax cuts.

There’s actually a slight upward trend to this line. If you look at share of GDP since the end of World War II, the average is 17.9%. If you look over the past 50 years, it’s the 18.1% I have displayed on the graph. Over the past 40 years, it’s 18.3%, and over the past 30 years it’s 18.4%. So there is a creeping upward (measured as a share of the economy), but it’s pretty slow: one or two tenths of a percent of GDP over time. Remember that a flat line on this graph would still represent more real dollars each year going to the federal government.

Still, the overwhelming impression this graph should give you is that of a basic constancy since World War II.

Now let’s add State & local taxes to this graph.

federal state and local taxes (share of GDP)

You can see that while Federal taxes have remained roughly constant (with fluctuations), State & local taxes have grown fairly steadily over time, measured as a share of GDP.

Now let’s add the two lines together to see government’s total take from taxpayers. Check out the orange line up top.

federal plus state and local taxes

It’s a little hard to see the long-term trends on the orange and red lines, but the greatest graphing program ever, Swiff Chart, allows me to add trend lines that make it easier to see.

total taxes with trend lines

From this graph, you can see our conclusions:

  1. Federal taxes have remained roughly constant as a share of the economy since the end of World War II, at just over 18% of GDP (I use 18.1%, others use 18.3%).
  2. Even if federal taxes remain constant as a share of GDP, total taxes collected by the federal government are going up in real terms.
  3. In contrast to federal taxes, State and local taxes have grown fairly steadily since 1950.
  4. So the trend line of government’s take of the U.S. economy is steadily upward since the end of World War II, from around 21% of GDP in 1950 to about 28% now. Seven cents more of each dollar earned are going to government now than in 1950.

Please remember that just-over-18 percent of GDP number from #1. You’re going to need it later.

16 responses

  1. Pingback: Taxes Rising Over Past 50 Years « 36 Chambers - The Legendary Journeys: Execution to the max!

  2. One significant element not included is the amount of "burden" imposed on businesses and the citizenry by government that doesn't show up as taxation — regulatory burdens, lawsuit abuse, etc. These burdens have increases dramatically within the timeframe examined.

  3. Pingback: Bret Swanson - Maximum Entropy » Blog Archive » Tax Facts

  4. Keith,
    this is great, but how about a comparison of government expenditures over time and how they're projected? Especially as relates to GDP.

  5. Dave: I'd love to see that explored. According to this chart with massive changes in the marginal rates and tax codes we've never seen the % of the GDP number outside the bounds of around 15-25%. To me this means my guess is it stays around the same, even if rates go up. Which makes it difficult to explain how we're going to pay off the spending

  6. Of course the percent of gdp goes up if the numerator goes up, or if the denominator goes down.

    Or both. *sigh*

  7. There is an implicit assumption that the GDP figures are accurate. If, as some allege, the government statistics have developed a bias toward understating inflation, and hence overstating GDP, then your graphs understate the real rate of increase in taxes.

  8. Pingback: Taxes And Tea Bags | But Then What

  9. Health care costs in the US have risen from 6% to 16% of GDP of the time of the graph, with half the costs split between Federal and local governments. No other nation has health care cost increases these high. If health care costs were no more than 10% of GDP which is higher than nearly every single other nation with universal health care, the cost of government would be 4-5% lower at no cost in health outcomes.

    • But saying that healthcare costs are higher in the US than the rest of world is misleading in the context in which you do. #1 – they are so because we can afford them to be. Over time, the largest percentage increase of discretionary spending has been leisure and vacations – not healthcare. #2 – its not clear that this is bad per se — healthcare is a local service for the most part and one man's expense is another man's income and #3 – the rest of the world gets a free ride on our innovation. For example, US drug companies sell to many single payer markets based on marginal cost pricing. While drugs are more expensive here, the innovations mostly originate here (the same is true for devices and other aspects of healthcare). The benefits to the US economy of having a robust pharma / device industry are many in terms of taxes and jobs. But most profoundly, in terms of new and innovative therapies that lead to a quality of life that single payer markets deprive their populations of.

      • what percentage of the (benefits to the US economy) sill cannot afford healthcare? how much of the population is just denied healthcare period? the solution is more human than economic.

  10. Pingback: Dr. Krugman telegraphs the Left’s long-term fiscal strategy  |  KeithHennessey.com

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