Date: 2024-12-21 Page is: DBtxt003.php txt00018331
The US Economy
History of Taxation
Where the Money Went ... The United States had plenty of money half a century ago. Where did it go?
Peter Burgess
The United States had plenty of money half a century ago. Where did it go?
Source: Office of Management and Budget, Historical Tables, Table 2.3; https://www.whitehouse.gov/omb/historical-tables/ (Last accessed August 19, 2019)
The United States is suffering from four decades of decreasing public investment in our future growth and prosperity. Our infrastructure is gradually crumbling and now needs trillions of dollars of work. Research and development have been cut so much that the US is now in second place and high-quality higher education is becoming unaffordable for most middle-class students. Yet every time someone proposes new investments in our future, they are told that the nation is broke, massively in debt, and cannot afford new investments.
How can the wealthiest nation on Earth be broke? If we are broke, how did we get that way?
The United States had plenty of money half a century ago. In the 1950s and 1960s, we paid down the huge World War II debt at a time when we maintained a much larger military than today and fought wars in Korea and Vietnam. We built the Interstate Highway System and much of the other physical infrastructure we use today. We funded vigorous research and development, including the fabulously expensive Apollo program. We supported higher education well enough that middle-class students could graduate from elite universities without crippling debt.
Those investments in debt reduction, infrastructure, knowledge, and people powered economic growth more than twice what we have seen in the last eighteen years. How did we pay for all those investments and why can’t we do it now? Where did the money come from and where did it go?
The revenue side of the answer is hidden in plain sight, in official Office of Management and Budget tables available at whitehouse.gov. Total federal revenue remained surprisingly stable over the last sixty-six years, ranging between 15 and 20 percent of Gross Domestic Product (GDP), but the share paid by corporations declined dramatically.
US corporations have created a federal tax holiday for themselves that has grown to over one trillion dollars per year. During 1952–1956, the total revenue that came from corporations, mostly income taxes and excise taxes, was 7.7 percent of GDP. By 2014–2018, total corporate taxes had dropped to 2.1 percent, a drop of 5.6 percent. That 5.6 percent of GDP was worth over $1.1 trillion in 2018.
The trillion-dollar-a-year corporate tax holiday was put in place during the thirty years following peak corporate tax payments in 1952. Corporate tax payments dropped under presidents of both parties, but the largest drops occurred under Republican Presidents Eisenhower, Nixon, and Reagan. Comparisons that go back thirty-five years or less don’t show most of the drop because it was largely complete by 1983.
The tax holiday resulted from corporations using political influence to shift more than two thirds of their tax burden onto increased individual taxes, reduced federal investments, and increased federal debt. The money they saved funded a proportional growth in after-tax profits, most of which went to dividends, stock buy-backs, acquisitions, and trillions of dollars of cash that corporations have accumulated in domestic and foreign accounts.
Corporate representatives complain about high corporate income tax rates, but this is the most lucrative lie of the last century. Corporate tax rates don’t mean much because most corporations don’t pay them. A 2016 Government Accountability Office report found that profitable US corporations paid an effective federal income tax rate of about 14 percent for 2006–2012, compared with statutory rates of 15–35 percent. Corporations pay tax at a lower rate than workers’ payroll taxes by themselves, not counting individual income taxes. Two-thirds of all corporations paid no income taxes at all. Corporations are freeloading on a grand scale.
The Economic Policy Institute has produced several reports detailing “how corporations rig the rules to dodge the taxes they owe.” They found that the tax breaks claimed “are highly concentrated in the hands of a few very large corporations.” They also found that among large corporations with significant foreign profits, two-thirds paid higher tax rates on foreign profits than they paid on US profits.
The huge drop in corporate taxes was matched by huge growth in individual taxes, mostly in the form of payroll taxes that workers pay even when they don’t make enough to pay income taxes. Individual income taxes grew by a half percent of GDP despite large decreases in marginal tax rates for the wealthy, while the payroll taxes that pay for Social Security and Medicare grew by four percent of GDP.
Payroll taxes are dedicated to pay for their matching social insurance programs and are not available to pay for other expenses. The trillion-dollar a year corporate tax holiday, therefore, must take money from investments in America’s future and other on-budget spending such as national security. It’s no wonder the US has to keep borrowing to pay for basic government functions.
Corporations, however, can once again pay their share in supporting the country. Returning corporate tax rates to former levels will not accomplish much. The major focus must be on removing the tax subsidies and loopholes that large corporations use to avoid paying taxes. We should also try to recover some of the taxes that corporations haven’t been paying for the last 40 years. We would then have the money to pay down our debt and make needed investments in our future.
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