Taxes and Government Spending - The Federal Budget

Federal Revenue

Funds collected by the government include proceeds from the sale of land, capital, or services, and collections from taxes, fines, duties, and fees. In January 2005 the Congressional Budget Office (CBO) reported in The Budget and Economic Outlook: Fiscal Years 2006 to 2015 that the United States government collected approximately $1.88 trillion in 2004. As a result of the tax-cutting measures instituted by the Bush administration, these sums were 7.2% lower overall than in 2000, when $2.03 trillion was collected. Individual income tax revenue, at $809 billion in 2004, was down 19.5% from the $1,004.5 billion collected in 2000, and tax revenue declined in other categories as well. Corporate tax revenue decreased 8.6%, from $207.3 billion in 2000 to $189.4 billion in 2004, and estate and gift tax revenue dropped 14.5%, from $29 billion to $24.8 billion. Miscellaneous receipts also declined (23.8%), from $42.8 billion to $32.6 billion. Areas that showed increases between 2000 and 2004 included social insurance taxes (1.5%) from $652.9 billion to $733.4 billion, excise taxes (1.5%) from $68.9 billion to $69.9 billion, and customs duties (6%) from $19.9 billion to $21.1 billion.

The Budget and Economic Outlook also reported federal revenue by source as a percentage of GDP. Since the

FIGURE 8.1

end of World War II, revenues as a share of GDP have generally ranged between 16% and 19% (averaging about 17.5%), with 2000 representing the highest ever at 20.9% (tied with 1944). By 2004, according to the CBO, total revenue as a percentage of GDP had been reduced 22% to 16.3% of GDP, the lowest rate since the 1950s. The impact of the Bush tax cuts can be seen in the reduction of individual income taxes from 10.3% of GDP in 2000 to just 7% in 2004. During the same period, according to the Budget and Economic Outlook, corporate income taxes declined from 2.1% of the GDP to 1.6%; social insurance taxes went from 6.7% to 6.3%; excise taxes were reduced from 0.7% to 0.6%; estate and gift taxes decreased from 0.3% to 0.2%; and miscellaneous receipts declined from 0.4% to 0.3% of GDP. Customs duties remained constant between 2000 and 2004 at 0.2% of GDP.

Figure 8.1 shows the changes in main sources of federal revenue as a percent of GDP since 1960 and projects further changes through 2015. The CBO reported that over the period from 1962 through 2004 social insurance taxes had shown the biggest rise as a percent of GDP, from 3% in 1962 to 6.3% in 2004, while corporate income taxes had shown the largest decrease, from a high of 4.2% of GDP in 1967 to 1.6% in 2004. By 2015 total federal revenues are projected to reach 19.5% of GDP.

Federal Spending

Federal outlays are payments made by the government for goods, services, or property and include the issuance of bonds and interest payments on coupons. In The Budget of the United States Government: Historical Tables Fiscal Year 2005, statistics on federal spending since the 1960s show that budget priorities can change significantly over time. According to "Outlays by Function and Subfunction 1962–2009," national defense spending in 1962 totaled $52.3 billion, approximately 49% of the $106.8 billion in total federal outlays that year. Spending for education and social services in 1962 equaled $1.2 billion (about 1% of outlays), and Social Security spending reached $14.4 billion (13.5% of outlays). At $6.9 billion, net interest on Treasury debt securities amounted to 6.5% of total federal outlays in 1962. By 2003, defense spending, at $404.9 billion, comprised only 18.8% of the $2.2 trillion in federal expenditures. Spending for education and social services in 2003 had increased to $82.6 billion (3.8% of outlays), and Social Security expenditures, at $474.7 billion, had risen to 22% of federal outlays. Net interest on Treasury debt securities had risen to $236.6 billion, 11% of all government expenditures.

Federal Deficit

When the government spends more money than it takes in, the difference is known as the "budget deficit." According to the Monthly Treasury Statement (February 2005) released by the Financial Management Service (FMS) of the Department of Treasury, during fiscal year 2004 the federal government took in nearly $1.9 trillion and spent almost $2.3 trillion, leading to a budget deficit of approximately $412 billion. "Profile of the Economy" (Office of Macroeconomic Analysis, Treasury Bulletin, March 2005) indicated that the 2004 budget deficit was $34 billion more than the deficit during the previous fiscal year.

In The Budget and Economic Outlook the CBO reported that the budget deficit in 2004 equaled 3.5% of the GDP for that year. This was the highest deficit since 1993, when it was 3.8%. Since the 1960s the federal government has operated with a budget surplus only four times: 1998 (0.8% of GDP), 1999 (1.4%), 2000 (2.5%), and 2001 (1.3%). Over the twenty-year period 1985 through 2004, the federal government averaged an annual deficit of 2.19% of GDP. For fiscal year 2005 the federal budget projected an increase of $15 billion in the budget deficit but then anticipated reducing the deficit to $207 billion by fiscal year 2010. The Bush administration maintained that lowering tax rates would stimulate economic activity and lead to increased federal revenue. Administration officials asserted that when combined with reduced government spending, the higher revenue amounts would reduce the budget deficit by half, a contention disputed by many economists.

Federal Debt

Whenever the federal government has a budget deficit, the Treasury department must borrow money to cover the difference. The total amount of money that the Treasury has borrowed over the years is known as the "public debt." Most of the federal debt is in the form of Treasury securities (bonds issued by the government to finance federal operations). Through the issuance of securities the government borrows money with a promise to pay it back with interest after a set term. Treasury bills (issued with terms of less than one year), Treasury notes (maturing between one and ten years), and Treasury bonds (with set terms of more than ten years) are among the most common securities and are actively traded on a secondary market. Savings bonds, also issued by the Department of Treasury, are different from other government securities in that they are redeemable only by the person to whom they are registered and may not be traded. Savings bonds may be redeemed without penalty after five years, although they continue to earn interest until thirty years from the purchase date.

Table 8.4 provides the amount of debt held by the federal government during selected years from 1791 through 2005. Great increases in federal debt have often been associated with costly wars, including a 3,725.7% increase during the Civil War and Reconstruction period of the 1860s, an 878.4% increase during the decade of the First World War, and a 499% increase during World War II. However, during the relatively peaceful 1980s federal debt nevertheless increased 247.6%, from $930.2 billion to $3.2 trillion. Between 1990 and 2000, federal debt rose 75.5%, and between 2000 and 2005 it rose 36.2%. As of March 2005, about $4.5 trillion in federal debt was owed

TABLE 8.4

to individuals, corporations, state or local governments, or foreign governments, and approximately $3.2 trillion in debt was held by trust funds, revolving funds, and special funds within the government itself.