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A Few Facts About U.S. Tax History
April 19, 2015
I haven't really looked into any tax issues since about 2010, when I
was doing a bit of research on the flat-taxers that emerged in the
24, 2011: Russia Today
January 17, 2010: The Futility of Raising Taxes
Tax policy in the U.S. has been a locus of fairly intense discussion
since the 1970s, so I figured that it was something that was already
taken care of.
Nevertheless, I got into a discussion about U.S. tax policy recently,
and realized that my memory of these issues was rather rusty. So, I
thought I'd look into a few issues in U.S. tax history. Maybe you
could say this is a personal refreser, but I think it would also be
helpful to others who are not so familiar with these things.
Our information today comes primarily from here:
Here's what it looks like since 1929. This is all levels of the
government, Federal, state and local. We see a gentle upward trend from
1950 to 2000, and what looks like the beginnings of a downward trend
since 2000. We can see here that there was no meaningful falloff in
overall tax revenue after either the 1964, 1983, 1986, 1997 or 2003 tax
reforms, which involved lower tax rates. Nor was there any meaningful
rise after the tax increase of 1969, the bracket creep of the 1970s, or
the tax rate increases of 1990 or 1994. Much of the variation here
appears to be cyclical, most obviously in the 2001 and 2009 recessions,
with smaller dropoffs in the 1982 and 1991 recessions.
On the General Government basis, we can also see that any deficits were
basically the result of higher spending, not lower revenue; and that
the disappearance of the deficits around 2000 were due to lower
spending, plus a little higher revenue which made a momentary peak (due
primarily to capital gains related to the 1997-2000 stock bubble).
Here's the breakdown between Federal tax revenue and state and local
revenue. The Federal revenue has been quite flat, with the variation
again primarily associated with recession and expansion, not tax
policy. The state and local revenue, however, has risen considerably.
Here's what it looked like in 2012. Unfortunately, I don't have data
here on state and local revenue sources going back to the 1950s. I
think that sales taxes have gone up a lot, as perhaps property taxes
have as well.
Here's the breakdown on Federal tax revenues. The overall pattern has
been very flat since about 1950, with some variation associated with
recession and expansion. There isn't much change related to tax policy.
The falloffs in revenue since 2000 are something of a new phenomenon.
We see also that the Individual Income Tax revenue has been quite flat,
despite a wide range of policies ranging from the 91% top rate of 1950
to the 28% top rate of 1988, exemptions high or low, and various tax
Here's a long description of all tax brackets and rates 1945-2013:
A few interesting things: look at the huge bracket adjustment of 1988.
The brackets didn't move in the 1970s despite inflation, so people were
paying high taxes on lower and lower income. The 1988 adjustment
corrected this, and also introduced inflation-indexing of tax brackets.
The bracket adjustment made no difference in tax revenue, as we have
The Corporate income tax revenue/GDP, however, has had quite a lot of change, from
levels above 5% in the 1950s to levels around 2% today. At the same
time, revenue from Payroll taxes have risen enormously, along with
payroll tax rates. Excise and "other" taxes were more significant in
the past, and have declined. This probably includes tariffs.
Here's what the payroll tax rates look like. The total is 50% paid by
employees and 50% paid by employers. The dip in 2009-2010 reflects a
temporary tax reduction during that time in response to a recession.
Here's a history of nominal corporate tax rates in the U.S. This does
not include state-level taxes, which are now around 5%, for a total of
around 39.1%, which is now the highest corporate tax rate in the
developed world. I suspect that state level taxes were lower in the
The most significant change in corporate tax rates was in 1987-1988,
part of that tax reform. However, note that the big falloffs in
corporate tax revenue actually take place long before this, and had
fallen to a low level by 1980.
This is a look at Federal tax revenues, omitting for now the Individual
Income Tax. Also, it is in a "cumulative" style rather than overlaid.
On the bottom we see the large decline in corporate tax revenue, from
levels above 5% to below 2%. We see no change at all due to the
1987-1988 reduction in tax rates, indeed there is a small rise
I am intrigued that the falloff in corporate tax revenue was
accompanied by a rise in payroll tax revenue, such that the two
somewhat cancel out. Since the payroll tax is 50% paid by corporations,
it could be called a sort of corporate tax. Anyway, the corporations
write the checks to the IRS. We have already seen that Individual
income tax revenues have been very stable for 60+ years. Apparently,
individuals have an opinion of how much they want to pay the Federal
government, and they pay that much and no more. Maybe the same is true
for corporations, and why not since corporations are run by individuals
too. Maybe corporate managements also have a sense of how much they
want to pay the government, via both payroll and income taxes, and they
pay that much and no more. I'm not saying that this is a topic of
discussion at board meetings, just as it is not a topic of discussion
among families. It just works out that way. The combined corporate
income and corporate-paid payroll taxes is the combo of the bottom two
divisions in this chart. It suggests that you could eliminate the
payroll tax -- all of it! -- and generate about the same amount of
revenue, with the deficit being filled by the corporate tax. But, this
is really a sort of goofy hypothesis on my part.
Here's an odd table, that I cooked up:
This table shows how much revenue came from various tax brackets
through history. We see that, for example, 81% of all tax revenue came
from brackets of 28% and below, even in the "high tax" 1950s, when the
top rate was 91%. Those very high tax rates were never an important
source of revenue. I adjusted these numbers to illustrate what it might
have looked like if the top tax rate was 28%, as it was in 1988. For
example, I take the "39.7 to 50%" revenue bracket, and assume that it
was taxed at 28% rather than 50%. This is done by simply multiplying by
28/50. For the "above 50%" range, I use 70%. Then, I total it all up.
For 1958, for example, we find that you would get 92.46% of the revenue
by having a 28% top rate instead of 91%. This makes a lot of static
assumptions, of course; in reality, what would happen is that people
would engage in more taxable activity at 28% than 91%, so you would
have more tax revenue/GDP than the results of these static assumptions.
But more importantly, you would have a much healthier economy. Although
various tax rates haven't affected revenue/GDP much, they definitely
affect GDP as a whole. So, if you have the same revenue/GDP with a
better tax system, but GDP is more than it would be under a poor tax
system, then overall revenues are obviously higher -- which can be used
to pay for various social programs if desired. Also, since the economy
is much healthier, you have more employment and also rising wages,
which in itself eliminates a lot of social issues. Thus, spending on
social programs can decline. The total spending/GDP can decline, which
can lead to further tax reductions such that we could bring the total
goverment (Federal, state, local) revenue/GDP from around 27-28% to
somewhere under 20%. This would allow, for example, the total
elimination of payroll taxes, among other such options. You might even
find that corporate tax revenues rise as corporate-paid payroll taxes
decline, the opposite of the trend since the 1950s.
The various flat-tax proposals around today are designed -- on a
"static basis" -- to create the same amount of revenue as the existing
income tax system. The rates are typically around 18%-19%, and include
a rather generous basic deductible. Since these proposals are designed
to create the same amount of revenue, and we observe that actual
revenue has been about as flat as any economic series can be even with
wildly different tax policies, it is a reasonable assumption that the
intended flat revenue/GDP would indeed result. The 18%-19% rates would
also apply to corporations.
I don't agree with the notion that "corporations don't really pay
taxes, people do." Actually, corporations do pay taxes. The indirect
payers of these taxes is of course the corporation's shareholders, not
some nebulous "people". Corporate tax rates and top individual tax
rates should really be in line with each other.
The introduction of corporate income taxation also has a major effect
on the capital structure, particularly debt financing since interest is
expensed. I would definitely consider taxing on the basis of EBIT,
before payment of interest on debt. This would eliminate that
distortion between equity and debt. Dividends are paid after-tax on the
corporate level, so they should not be taxed on the individual level.
If debt interest was after-tax, then it would be taxed on the corporate
level, and should not be taxed on the individual level.
One interesting outcome of taxing profits before interest payments is
that debt financing becomes rather unattractive. If you want a
predictable income something like a bond, why not just use something
like preferred stock, with a fixed dividend, which would then not have
any tax disadvantages? It would also make the present debt-based
banking system obsolete. Instead, banks and other banklike structures
could be essentially equity-financed, with a variety of interesting
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