To understand how tax policies in the U.S. ought to be changed, it is necessary to know how and why they have changed in the past. This report traces major trends in government revenue and spending priorities from 1950 to 1996. Major findings include: Total tax burden is high and very progressive by historical standards; spending has shifted toward entitlements and away from constitutionally required services and services that benefit everyone equally; and several major trends in taxes and spending came to an end or reversed themselves in the early 1990s.
A national debate is taking place over how to reform the U.S. tax system. Proposals are on the table to replace the current federal income tax with a simpler “flat-rate” income tax or a national retail sales tax. By studying the past, we can learn why the current tax and spending priorities were chosen (or spontaneously evolved) and decide whether those priorities are still (or were ever) valid. By learning the lessons of the past, we are more likely to arrive at consensus and wise decisions about how to change current tax policies.
1. Tax burden is high by historical standards.
The most pronounced change in tax policy during the past forty years has been the rise in the level of overall taxes. The average real per-capita tax burden rose 121 percent between 1960 and 1992. The typical American family paid over 40 percent of its total income in taxes in 1995. In 1996, the average American had to work 128 days just to pay his or her taxes, compared to 108 days in 1960 and just 44 days in 1930.
Individual tax burdens grew dramatically, relative to personal income, until the 1980s, when sustained economic growth and lower rates of inflation allowed personal income growth to keep pace with the rising cost of government. Data from the 1990s show government is once again growing faster than personal income.
Since 1950, all three levels of government have dramatically increased their reliance on payroll taxes as a source of revenue. At the federal level, the share of total revenue derived from individual income taxes remained relatively stable between 1960 and 1992, but Social Security and Medicare taxes rose from 7 percent of total revenues in 1960 to 17.4 percent in 1992. State governments increased the share of their total receipts from this source from just 8.3 percent in 1950 to 31.9 percent in 1993. Local governments, which historically have not relied on income taxes, nevertheless increased their real per-capita collections from this source by a remarkable 1,911 percent between 1950 and 1991.
Governments also burden their citizens with a variety of indirect costs that often escape public attention and debate. These non-tax government revenues include the cost of complying with the tax code ($235 billion a year), future obligations or debt (at least $180 billion a year), inflation ($142 billion in 1994), and complying with regulations ($677 billion a year). When added to the tax burden, these additional costs mean that Americans must work for the government a staggering 193 days a year before they can begin working for themselves.
Spending on Social Security and Medicare, public welfare, and health rose from 10.7 percent of all spending in 1960 to 26.2 percent in 1992. While spending on these entitlement programs was rising, spending by all levels of government on defense, highways, and other constitutionally required or basic government services that benefit all citizens fell from 42.6 percent of all spending in 1960 to 21.9 percent in 1992.
The trend toward spending on entitlement programs rather than constitutionally required services or services that benefit everyone slowed dramatically during the 1980s, as shown in the figure on this page. Nearly all of the trend noted for the long-term period (1960-1992) occurred prior to 1980.
On the revenue side, the federal government significantly reduced its reliance on individual income taxes during the 1980s. This reduction was largely offset, however, by state governments that continued their dramatic shift toward income taxes, while lowering their reliance on property, corporate income, and excise taxes. After two decades of reducing their reliance on property taxes, local governments during the 1980s increased their reliance on this tax, and also increased their reliance on retail sales and excise taxes.
The federal government accounts for about 80 percent of all government debt, a share that has remained relatively constant since 1960. Debt has been rising for all levels of government, causing interest payments to emerge as the fourth largest expenditure item in 1992, accounting for 10.5 percent of all government spending.
At the state level, the trend toward spending on entitlement programs escalated during the 1980s, opposite the trend found at the federal level and for all levels combined. State spending on public welfare, education, and health and hospitals rose from 37.4 percent of total state spending in 1952 to 49.3 percent in 1980 and 53.8 percent in 1993. State spending on basic services (natural resources, highways, and “other general spending”) fell from 39.5 percent in 1952 to 31.3 percent in 1980 and 25.3 percent in 1993. Local governments experienced a weak trend toward entitlement spending from 1950 to 1980, and virtually no change in relative shares of spending during the 1980s.
Contrary to popular belief, real per-capita federal aid to state and local governments did not fall during the 1990s, and now stands at a historic high. Such aid rose from $6.5 billion in 1960 to $88.7 billion in 1980 and $185.7 billion in 1993. Adjusted for inflation and population growth, real per-capita federal aid to state and local governments declined slightly during the early 1980s but rose during the late 1980s and early 1990s.
The moderation of total tax burden during the 1980s, as measured by the Tax Foundation’s Tax Freedom Day, was reversed during the 1990s. Americans had to work five more days in 1996 than in 1990 to pay for their taxes. The total number of work days required to pay for taxes rose from 123 in 1990 to 128 in 1996.
The long-term trend toward income taxes and away from other types of taxes stopped and may have reversed itself during the 1990s. State governments, which aggressively increased their reliance on income taxes prior to the 1990s, saw a slight decline in the share of total revenue raised through income taxes between 1993 and 1995. Eight states cut marginal income taxes in 1994 and 1995.
The trend at the state level toward spending on entitlement programs and away from basic services may also have stopped in the mid-1990s. Between 1994 and 1995, state spending on Medicaid for the first time grew more slowly than did overall state spending, and spending on public aid fell from 5.1 percent to 4.0 percent of total state spending. Since the trend toward entitlement spending had already stopped or been reversed at the federal and local levels, it is likely that the trend toward entitlement spending by all levels of government combined also stopped during the 1990s.
Understanding this history of taxes in the U.S. can help us make sense of proposals to change tax policy today and in the future. People who support more (or less) progressive taxation should be challenged to tell us whether they mean more (or less) progressive than in 1950, 1960, 1970, or 1996. Depending on their answer, the policy change needed to achieve their objective may be the opposite of what they advocate.
Calls for more (or less) spending on entitlements or basic services should be met with a similar question: Was the balance between entitlements and basic services better in 1950 or 1960 than in 1996? If it was, why did the balance change? And why, as is apparently the case, has the trend toward one type of spending and away from another stopped in recent years? Answers to such questions are surely relevant to a discussion of future tax and spending policies.
Based on Joseph L. Bast and Diane Carol Bast, “A Taxing Matter: Changes in Government Revenue and Spending Priorities, 1950 – 1996,” Heartland Policy Study #80 (Chicago, IL: The Heartland Institute, April 1997). Copies of the study are available from The Heartland Institute for $15 each. You can also download the full text, free of charge, in Adobe’s PDF format; click here.
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9. Several long-term trends reversed themselves during the 1990s.
8. Federal aid to state and local governments is at historic highs.
7. Spending by state governments during the 1980s continued to shift from basic services to entitlement programs.
6. Interest on debt has emerged as a major expense item for all levels of government.
5. Several long-term tax and spending trends slowed or stopped during the 1980s.
4. Spending has shifted toward entitlement programs and away from constitutionally required services and services that benefit everyone.
3. Non-tax government revenues are also at historic highs.
2. The current tax system is progressive by historical standards.