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Federal Revenues

Abdulrahman J. AlTimani

Sam D. Bellamy

Joseph E. Benham

George Mason University

2017.10.23.​

Where do revenues come from?

Federal revenues financed over $3.3 trillion of the $3.9 trillion that the U.S. Spent in FY 2016. The remaining amount was financed through borrowing ($585 billion)

The Individual Income Tax

Nearly half of all federal revenue (47 percent) comes from individual income taxes. The income tax is generally progressive: higher-income households pay a larger share of their income taxes than lower households do.

“The individual income tax is riddled with deductions, exemptions, and credits that provide special benefits to selected groups of taxpayers and favored forms of consumption and investment. These tax preferences make the income tax unfair because they can impose radically different burdens on two different taxpayers with the same income. “

Joseph J. Minarik, “Taxation,” The Concise Encyclopedia of Economics

The Individual income tax

Besides raising revenue, the individual income tax serves a social function by allocating resources, subsidizing some persons or activities, encouraging certain kinds of economic and social behavior, redistributing wealth, stimulating economic growth, and addressing specific social problems such as pollution and urban decay.

Again, the tax is a progressive tax -- with the percentage of tax increasing as the net taxable income of a taxpayer increases.

http://tax.findlaw.com/federal-taxes/individuals-and-income-tax.html?version=2

Payroll Taxes

The second largest source of federal revenue comes from payroll taxes, which are assessed on the wage or salary paychecks of almost all workers.

The individual and corporate income taxes are designated as federal funds, but payroll taxes are designated as trust funds.

These funds can only be used for specific purposes, mainly to pay for social security and Medicare

Payroll Tax (Cont.)

Payroll Tax (Cont.)

The share in federal revenues derived from social insurance taxes has more than doubled since the 1960s

Employers take 7.65 percent of their employees’ earnings for these payroll taxes 6.2 percent for social security while another 1.45 percent goes towards the funding of Medicare.

“Payroll taxes as a whole are regressive they collect a higher percentage of total earnings from lower-income workers than higher-income ones.”

https://www.cbpp.org/research/federal-tax/policy-basics-where-do-federal-tax-revenues-come-from

Corporate Taxes

  • Corporate income taxes make up about 9 percent of federal revenue, with the remaining 9 percent coming from excise taxes, estate taxes, and other taxes.
  • Revenues produced from corporate income taxes are only about half of what they were after World war II.
  • The tax rate for most corporations is 35 percent yet the percentage in earnings a corporation actually pays in taxes will vary from one corporation to the next. This is due to how complex the tax code is, along with various loopholes that are used to avoid tax liability.

Other Taxes...

- Excise taxes are collected on the sale of certain goods (like alcohol, and tobacco); they are intended to raise revenue and, in some cases, discourage consumption of the taxed product. These made up about 3 percent of federal receipts in 2016.

- The estate tax is a tax on assets such as real estate or stocks that are transferred upon the death of the owner to their heirs. “Because the first 10.9 million of a married couple’s estate was exempt from the estate tax, fewer than the wealthiest two of every 1000 estates nationwide owed any estate tax in 2016.”

https://www.cbpp.org/research/federal-tax/policy-basics-where-do-federal-tax-revenues-come-from

Other Revenue (Cont.)

Other Revenue (Cont.)

User Charges include:

- charges for goods or services the government provides. (Medicare Part B premiums, postal services, national park entrance fees)

- Charges for government regulated activities such as patent and licensing fees.

- Benefit charges for taxes on airline tickets and gasoline

- Liability based charges for environmental damage or injuries (coal mining for black lung disease or cleaning up of oil spills.)

Allen Schick The Federal Budget pg. 190 3rd Edition. 2007 Pgs. 188 -189

Sources of Fed Tax Rev.

Sources of Fed Tax Rev.

Revenues History

Revenue History

The United States was established when the colonists revolted against taxation without representation.

Allen Schick The Federal Budget pg. 190 3rd Edition. 2007

Now, Congress has developed a system that collects more than $3 trillion in revenue.

http://facts.net/wp-content/uploads/2015/06/Revolutionary-War-Facts.jpg

Revenue has Increased in the 20th Century

as the Size and Scope of Government Has Increased.

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 (around 100 years ago), an avg. of 25% in the 1960’s and to over 35 percent today.

Total Direct Revenue as a Percentage of GDP

Total Direct Revenue as a Percentage of GDP

from FY 1960 to FY 2017

Revenues History – Income Tax

“The present federal income tax dates from the act signed by President Wilson on October 3, 1913. That act was made possible by the ratification of the Sixteenth Amendment to the Constitution adopted on February 3, 1913. Earlier federal income tax laws had been repealed or held unconstitutional. The income tax first became a significant source of revenue during World War I.”

http://www.taxhistory.org/thp/readings.nsf/ArtWeb/2D52A4CFD2844FAB85256E22007840E6?OpenDocument

Revenues History – Income Tax (Cont.)

Revenues History – Income Tax (Cont.)

- “Four tax reductions were enacted during the prosperous decade of the 1920s. Despite rate increases and new taxes in the 1930s, revenues declined with falling levels of income.”

- “The decade of the 1940s saw the income tax become a mass tax covering a large portion of the population. The withholding provisions of today stem from the Current Tax Payment Act of 1943. The deduction for medical and dental expenses, along with marital income splitting, were all enacted in the 1940s.”

- “The early 1950s saw an increase in individual and corporate rates due to financing needs of the Korean War. The second codification of the tax laws took place during 1954.”

http://www.taxhistory.org/thp/readings.nsf/ArtWeb/2D52A4CFD2844FAB85256E22007840E6?OpenDocument

Revenues History – Income Tax (Cont.)

Revenues History – Income Tax (Cont.)

- The 1960s saw the introduction of the investment tax credit and the enactment of income-averaging provisions. A major tax reduction was provided by the Revenue Act of 1964. Surcharges were enacted in 1968 and 1969, because of the Vietnam War. A major reform of the tax laws was provided in the Tax Reform Act of 1969.

- The decade of the 1970s was one of reform and simplification, with major tax acts passed in nearly every year. The Tax Reform Act of 1976 provided numerous reform measures, particularly with regard to syndicates and limited partnerships as well as estate and girt taxes.

- The theme of the 1980s and 90s was primarily one of reducing the federal government's budget deficits. A comprehensive revision of the federal tax system with a view to fairness, efficiency, and simplicity was enacted as the Tax Reform Act of 1986. The 1990S found a Congress concerned with the administrative structure of the Internal Revenue Service and involved in protecting taxpayer rights.

http://www.taxhistory.org/thp/readings.nsf/ArtWeb/2D52A4CFD2844FAB85256E22007840E6?OpenDocument

http://www.taxhistory.org/thp/readings.nsf/ArtWeb/2D52A4CFD2844FAB85256E22007840E6?OpenDocument

History

Social Security Payroll Tax

History

Social Security Payroll Tax

- Social Security Act signed by FDR on 8/14/1935

- Collected for the first time in January 1937

- Benefits started in January 1940

https://www.ssa.gov/history/hfaq.html

- Employee pays half and the employer pays half. Self employed individuals pay both parts.

- The cumulative rates have increased from 2 percent in 1937 to 12.4 percent in 2009 (and remains at 12.4 percent today)

- The maximum salary to be taxed on have increased from $3,000 in 1937 to $106,800 in 2009 (In 2017 this level is $127,200)

https://files.taxfoundation.org/legacy/docs/soc_security_rates_1937-2009-20090504.pdf

History

Medicare Payroll Tax

History

Medicare Payroll Tax

Social Security Amendment of 1965 signed by Lyndon B. Johnson as part of “Great Society Program.”

http://understandingmymedicare.com/learn-more/history-of-medicare/

Employee pays half and the employer pays half. Self employed individuals pay both parts.

The cumulative rates have increased from .70 percent in 1966 to 2.7 percent in 2009 (and remains at 2.7 percent today)

https://files.taxfoundation.org/legacy/docs/soc_security_rates_1937-2009-20090504.pdf

The cap on wages subject to Medicare taxes was eliminated in 1993 for tax years 1994 to present.

https://www.adp.com/tools-and-resources/adp-research-institute/insights/insight-item-detail.aspx?id=F5E4F8C7-0887-4C94-AFEB-21C7B25DD3BF

Revenue Outlook

Aging Population

- “Additional changes in the revenue process are likely in the years ahead, especially as Congress confronts the budgetary impact of an aging population.” Allen Schick The Federal Budget pg. 190 3rd Edition. 2007

- The aging population will continue to stress Social Security and Medicare.

Increase in Debt

Since 2007, imbalances in the United States Budget have gotten worse. Debt held by public has increased to 77.3% of GDP as of 2016 source:

https://www.cbo.gov/about/products/budget-economic-data#2

Structural Deficit

source: https://www.cbo.gov/about/products/budget-economic-data#2

Revenues will need to be INCREASED!

- Based on the aging population, current debt to GDP ratio, and structural deficit, the United States will either need to drastically cut spending, increase revenues, or do both.

- Fixing the fiscal imbalances with just spending cuts is not politically palatable.

- Both the FY 2016 Republican and Democratic presidential candidates ran on a platform of not reforming entitlement spending.

- Therefore, revenues will need to be increased!

But?!

  • The current administration is proposing tax cuts!
  • Not so fast

- Because of the proposed elimination of the state and local income tax deduction, taxes for many middle class individuals will increase.

- That along with the President’s lack of political capital (particularly in the senate) casts serious doubt about this tax cut being able to pass in its current form.

- However, Rand Paul (a key swing vote in the senate has recently supported the tax cuts)

What form will revenue increases take?

What form will revenue increases take?

  • Tax increases?

- Tax increases are not popular and 236 congressional representatives from the House and 41 Senators have signed Grover Norquist’s no-tax pledge.

Source: http://s3.amazonaws.com/atrfiles/files/files/Federal%20Pledge%20Signers%20112th%20Congress(2).pdf

  • European style Value Added Tax (This is a national sales tax.)
  • Border Adjustment Tax?
  • Soda tax?
  • Gas tax?
  • Increase Social Security and Medicare tax?

Conclusion for the Outlook

Conclusion for the Outlook

  • The outlook for revenue increases is hard to predict and we just don’t know when or in what form revenue increases may occur.
  • However, even if tax cuts pass in the short term, we believe that revenues will still need to be increased because of the current debt levels and structural deficit.

Controversies with Revenues

  • Grover Norquist’s no-tax pledge.

- Once a Representative or Senator signs, they lose their ability to compromise.

  • The morality of kicking the can.

- We are borrowing from future generations to pay for our current standard of living.

  • Reducing taxes will increase tax revenue by stimulating the economy.

- This is a commonly espoused conservative ideal. Professor Minarik debunked this theory in class.

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