Public Receipts in the United States

1952-1994

by John E. Dawson, Peter Stan

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Policy Context

The way public receipts are represented in the federal budget has become an important policy issue, as recent budget submissions illustrate. However, all of the proposed alternatives focus only on the federal sector; none presents a national budget in the context of the national economy.

The goals of the analysis described in this report are

  • To offer new, alternative ways of viewing federal, state, and local government receipts;
  • To focus attention on the major categories of public receipts that will shape the agenda for policy into the next century; and
  • To illustrate forms of presentation for public receipts that would benefit citizens and government decisionmakers alike.

To accomplish these goals, we develop three complementary schemes for classifying data on public receipts from the U.S. National Income and Product Accounts (NIPA) according to (1) the jurisdiction that receives the receipt (federal or state and local government); (2) the economic type of the receipt (e.g., personal income, corporate profits); and (3) the fund that receives the receipt (social insurance or "regular budget"). We use these classification schemes to discuss trends in public receipts relative to growth in the U.S. economy over the past 42 years, focusing on the largest and most dynamic components of these receipts.

Major Findings

While receipts increased from 25.4 to 30.2 percent of U.S. gross domestic product (GDP) between 1952 and 1994, expenditures increased from 26.3 to 32.2 percent of GDP during the same period. Hence, growth in expenditures exceeded growth in receipts by one percentage point of GDP, and the deficit has widened from 1 to 2 percent of GDP over 42 years.[1]

The 4.8-percentage-point increase in total receipts is the net result of a 5.4-point increase in receipts for social insurance and a 0.6-point decline in receipts for regular budgets of all levels of government. Nearly the entire increase in aggregate receipts occurred during a brief period between 1965 and 1969. Total public receipts have been steady at about 30 percent of GDP for 25 years.

Our three classification schemes provide complementary views of these movements in aggregate receipts, revealing different levels of detail in the process.

From the perspective of the fund that receives the receipt. When the non-social insurance budgets of all levels of government are considered together, regular budget receipts declined by 0.6 percentage point, or from 23.1 to 22.5 percent of GDP. However, receipts for the federal regular budget declined dramatically, from 17.2 percent of GDP in 1952 to 12.5 percent in 1994, while state and local regular budget receipts rose from 5.9 to 10.0 percent of GDP during the same period.

Social insurance receipts are generated when employers and employees channel funds from payrolls into earmarked accounts. The government manages these accounts, from which citizens expect to receive benefits as income at some later point in life. Income returned is subject to the political fortunes of the program, however, and may be greater or less than the payments actually made.

Social insurance receipts have increased from 2.3 to 7.7 percent of GDP, accounting for more than the overall increase in total receipts. Social Security and the Hospital Insurance portion of Medicare (Medicare Part A) account for all of the increase in social insurance receipts, rising from 1.1 percent of GDP in 1952 to 6.6 percent in 1994. All other social insurance receipts declined slightly during the period, starting at 1.2 percent of GDP and ending at 1.1 percent.

From the perspective of the jurisdiction that receives the receipt. Over the period considered here, federal receipts have been almost trendless, amounting to 19.2 percent of GDP in 1952 and 19.7 percent in 1994. This near trendlessness in the aggregate arises because of the increase in social insurance receipts and the offsetting decrease in regular budget receipts.

Federal receipts fluctuated throughout the period, ranging from 17.2 to 20.4 percent of GDP. At the same time, state and local receipts rose by 4.3 percentage points, from 6.2 percent of GDP in 1952 to 10.5 percent in 1994, almost matching the overall rise in total public receipts.

Therefore, there has been a huge shift in the receipts and taxation that support all government programs except Social Security and the Hospital Insurance portion of Medicare. This shift has been away from Washington and toward the states and localities. The dramatic growth of state and local receipts and the fact that state and local taxes are deductible in the computation of certain federal taxes highlight the need to include all levels of government in a receipt classification scheme.

From the perspective of the receipt's economic type. Personal tax and nontax payments, primarily income taxes, have declined slightly at the federal level, while state and local receipts have more than tripled. Overall, the personal tax category has risen from 9.6 percent of GDP in 1952 to 11.3 percent in 1994 because of the rise in state and local personal income taxes. The federal personal income tax has fluctuated in response to frequent and major changes, with the net result of ending the period slightly lower than where it began, relative to the economy.

The reduction in federal marginal rates, especially in the 1980s, reduced the significance of "tax expenditures" both as exemptions and deductions from taxpayers' taxable income and as a policy mechanism for government encouragement of certain economic courses of action by taxpayers. Nevertheless, the tax code reflects support for homeownership, health insurance, and wealth accumulation, especially for retirement.

The aggregate magnitude of tax expenditures also remains substantial. For example, in 1994 the two largest federal tax expenditures both related to income that was untaxed, and each resulted in nearly a percentage point of GDP in lost revenue. For comparison, receipts collected through the federal personal income tax amounted to about 8.2 percent of GDP.

Corporate profits taxes have experienced the largest overall decline among the various categories of receipts. Federal receipts from this source have been halved, while state and local receipts have risen slightly. Because this tax is far more prominent at the federal level of government than at state and local levels, its total has likewise been cut almost in half, declining from 5.5 percent of GDP in 1952 to 3.0 percent in 1994. This reduction reflects a decline in the taxable base of corporate profits relative to GDP during the period.

Indirect business tax and nontax payments (i.e., excise, sales, and property taxes) have been steady at about 8 percent of GDP over the period considered, although this trendless aggregate results from an increase at the state and local level offset by a substantial reduction at the federal level.

Integrating these views provides a composite perspective on broad trends in public receipts over the past 42 years. Net growth in public receipts has occurred as a result of

  • Increases in federal social insurance receipts for Social Security and the Hospital Insurance portion of Medicare but for no other programs.
  • Increases in state and local regular budget receipts. These occurred in the major, and historic, category of indirect taxes, but state and local jurisdictions also more than doubled receipts from corporate profits taxes and more than tripled receipts from personal income taxes. The latter increases put states and localities into direct competition with the federal government within the major tax bases for its regular budget.
  • Decreases in all categories of receipts for the federal regular budget. These declines were small in the personal-tax category but large in both corporate- and indirect-tax categories.

Policy Implications

Since the late 1960s, federal budgetary practice has attempted to focus attention on a one-dimensional view of federal receipts and expenditures in the "unified" budget. In recent years, the shortcomings of this approach have been increasingly recognized, and the principle of viewing receipts and expenditures in more than one way has again achieved prominence. To date, however, efforts to devise alternative ways of presenting receipts and expenditures have focused on federal accounts alone and have ignored the critical need to place receipts and expenditures within the context of the total public sector and the economy.

Classifications of public receipts help shape the debate about the government's role in the economy. The policy issues surrounding these receipts would be greatly clarified by supplementary budgetary presentations that

  • Separate federal regular budget and social insurance receipts, focusing on their very different dynamics;
  • Classify receipts by their economic type and highlight the different roles of the various types in the economy;
  • Treat aggregate state and local receipts, focusing on their interdependence with federal receipts through their use of the same tax bases; and
  • Facilitate decisions on the character of federal receipts by placing them in the context of total public receipts.

At a more fundamental level, we suggest that the current federal budgetary presentation is flawed at its base. In particular, it does not address the ongoing need for forms of presentation that enhance understanding of public receipts and facilitate decisions that shape them. Moreover, alternative budgetary presentations—including those suggested above—are not likely to result in significant progress. Rather, it is time to revisit the basis of how the federal budget is presented and to do so with attention to the fundamentals of budgetary communication and taxonomy.

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Notes

  • [1] Dawson and Stan (1994) analyzed expenditures over the period 1952 to 1993; this report extends coverage of receipts through 1994. In 1993, receipts were 29.7 percent of GDP, expenditures were 33.1 percent, and the aggregate deficit was 3.4 percent. The deficit declined during 1994 because of strong economic growth of 4.1 percent (and hence increased receipts) and the first year's results of the Budget Reconciliation Act of 1993 at the federal level. Total receipts, expenditures, and the surplus or deficit for each of the nine budgets that make up the framework of this analysis will be presented in the third report of the series.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Trends in U.S. Public Receipts, 1952-1994, from the Perspectives of Jurisdiction, Economic Type, and Fund

  • Chapter Three

    Tax Expenditures

  • Chapter Four

    Conclusions

  • Appendix A

    Treatment and Reconstruction of Data from the National Income and Product Accounts

  • Appendix B

    The Receipt Classifications Underlying This Report

  • Appendix C

    Source Code for Figures Derived from NIPA

  • References

This report is part of the RAND Corporation monograph report series. The monograph/report was a product of the RAND Corporation from 1993 to 2003. RAND monograph/reports presented major research findings that addressed the challenges facing the public and private sectors. They included executive summaries, technical documentation, and synthesis pieces.

This research in the public interest was supported by RAND, using discretionary funds made possible by the generosity of RAND's donors, the fees earned on client-funded research, and independent research and development (IR&D) funds provided by the Department of Defense.

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