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Letter of Transmittal
Part I. Overview of Federal Taxes and Revenue
Part II. The Federal Power of Tax
1. Constitutional sources of Federal taxing power
2. Role of the legislative branch
3. Role of the executive branch
Part III. Sources of Information About Federal Taxes
Part IV. The Federal Tax System
7. Social Security payroll taxes
8. Unemployment compensation payroll taxes
9. Internal Revenue Service operations and tax compli-
Part V. Historical Tables ....
Part VI. Federal Tax Expenditures
Part VII. Legislative Histories of Federal Tax Legislation
Part IX. List of Tax Provisions that Expired in 1992
Part X. The Distribution of Income and Taxes
PART I. OVERVIEW OF FEDERAL TAXES AND REVENUE
Federal tax revenues have remained stable, when compared with the size of the economy, for the last three decades. Although in dollar terms, Federal revenues have grown from $100 billion in 1962 to ten times that amount, or $1 trillion, in 1992, they have grown along with the economy, remaining between 18 and 20 percent of Gross Domestic Product (GDP) (see tables 2 and 4 of Part V).
The sources of Federal revenue have not remained so stable, however. Both economic trends and legislated changes in tax policy over the last 30 years have contributed to a Federal tax system that now relies more heavily on personal taxes and less on corporate and excise taxes than it once did (see table 3 of Part V).
TRENDS IN FEDERAL TAX REVENUE
Since the early 1960s, total Federal revenues have grown from $99.7 billion in 1962 to $1,091.7 billion in 1992. During these 30 years, revenues grew steadily each year, more or less at pace with the economy. Revenues topped the $1 trillion mark for the first time in 1990.
When compared to the size of the economy, revenues have remained quite stable, ranging between 18 percent and 20 percent of GDP. Only twice in the 30-year period have they inched over the 20-percent mark (to 20.2 percent): in 1969, when the Vietnam surtax was in full force; and again in 1981, when the very high inflation of the late 1970s and early 1980s was taking its cumulative toll. For the last few years, revenues have hovered just below 19 percent of GDP.
SOURCES OF FEDERAL REVENUE
Although total Federal revenues have remained stable, the relative importance of different sources of revenue have changed. Personal Taxes
Almost 82 percent of all Federal taxes are paid through the individual income tax and social insurance taxes. This represents an increase from the 63 percent share that these sources contributed to the total in 1962. Most of the increase is because of legislated increases in social insurance taxes that correspond with expansions in the various entitlement programs that these taxes fund.
The individual income tax has been remarkably stable over the last 30 years. It has consistently brought in just less than half42 to 48 percent of total revenues, and has paralleled the economy at about 8 to 9 percent of GDP. Although for years the progressive bracket structure of the income tax left taxpayers vulnerable to the automatic tax increases caused by inflation, legislated tax reduc
tions seemed to offset overall inflationary "bracket creep" pretty well. So, even though the income tax was not formally indexed for inflation until 1985, much of the tax increase implied by the inflation rate over the period was prevented by explicit tax cuts. Now that the main structural features of the tax code-personal exemptions, standard deductions, and the tax brackets are indexed for inflation, the personal income tax should steadily track the economy indefinitely.
Social insurance taxes have been the strongest growing tax source during the last 30 years. While only 17 percent of total revenues in 1962, these taxes have more than doubled as a source of revenue. They are now the second largest tax source, contributing 38 percent of the total last year. These include Social Security, Medicare, unemployment insurance, Federal retirement, and railroad retirement taxes. These taxes are earmarked to pay retirement, health and other benefits for these programs. As the programs have been expanded and increased over the years by legislation, taxes have been raised to fund the larger benefits requirements. Tax rates have been raised and expansions of the populations of workers subject to these taxes have been enacted. Corporate Income Taxes
Income taxes paid by corporations now contribute about onetenth of total revenues. This is a marked decline from the 20-25 percent portion they contributed during most of the 1960s. The major reason for the decline in relative importance of corporate taxes is, of course, the significant increases that have occurred in other taxes during these years. The most notable were in social insurance taxes, described above. But changes in corporate taxes themselves took place, too. Some of the decline has its explanation in legislated tax reductions-increasingly generous accelerated depreciation, larger numbers of tax preferences for specific industries and assets, and reductions in the corporate tax rate. Economic trends also worked to decrease the corporate tax base; for example, many companies increasingly financed their operations with deductible debt rather than with equity. Although corporate income taxes have been raised several times since 1982, this has not been enough to reverse the long-run trend.
Excise Taxes and Other Federal Revenue
The remaining portion of Federal revenue is comprised of excise taxes on domestic merchandise and services, tariffs on imported goods, estate and gift taxes, net Federal Reserve Earnings deposited with the Treasury, and miscellaneous fees and receipts. In combination, these sources contribute almost one-tenth of total revenues. This discussion will focus on excise taxes, the largest type in this category, and estate and gift taxes.
Excise taxes are levied on a wide variety of goods and services, like gasoline, air travel, tobacco products, alcoholic beverages, coal, sporting equipment, and many other items, including certain "luxury" items, such as automobiles, jewelry and furs. During the midand late 1980s, they brought in about $30 to $35 billion per year. Because of the deficit reduction decisions made in the 1990 Budget Summit, they now are responsible for about $45 billion per year.
The long-run trend, though, is downward. They have decreased from 13 percent of total revenues in 1962 to 4 percent in 1992.
Certain excise taxes have been repealed over the last 30 years. Some excise taxes imposed during World War II lingered for several years afterwards, and were only repealed during the 1960s. The windfall profit tax on oil, enacted in 1980, raised sizable revenue while oil prices remained high. But after the precipitous drop in prices in 1986, revenue fell off rapidly. The tax has since been repealed.
Many excise taxes are levied on a per-unit basis, rather than as a percent of the value of the good or service. For example, the tax on cigarettes is 24 cents per pack regardless of the price of the pack. Therefore, these taxes do not grow as inflation and other economic factors cause the price of the taxed items to rise.
Roughly two-thirds of all excise tax dollars are dedicated to certain spending purposes and are isolated in earmarked government trust funds. Examples are the taxes on fuel, truck and tire sales, and road use that finance the Nation's highway program; the taxes on environmental pollutants that finance certain toxic cleanup programs; and the taxes on coal that fund the Black Lung program for disabled miners.
Estate and gift taxes are a small source of Federal revenue. They now provide about $11 billion per year, 1 percent of the total. Through the late 1970s, they provided about 2 percent. But, their share dropped after enactment in the late 1970s and early 1980s of legislation to provide a combined tax structure for estate taxes and gift taxes and to raise the entry point of these combined taxes. A chart, illustrating the changing share of taxes over time, follows.