So it's tax season again and we wonder: why are taxes so high; what do our taxes go to funding? Globally, taxes are much higher in the developed nations than they are in the developing nations. The best way to illustrate this is to compare total taxation to total individual earnings. In this case, compare billable taxes to the GDP for each country.
In the image above shows the 2012 calendar year tax rate as a percentage of GDP for each country for which I could find data. Here dark green refers to a tax rate at or above 50% of GDP. Medium green refers to half this rate; light green illustrates rates below 10%. These rates reflect net tax tied to income. For instance, in the U.S. this includes both federal income tax and also average state income taxes. Notice that the net rate for the U.S. is right around 25% which positions it about half the rate of Europe yet quite high compared to many developing countries. Has this rate changed a lot over time?
This graph illustrates total tax revenue (% of GDP), tax expenditure (% of GDP), and total GDP (right axis in billions) per calendar year since 1962. Data for 2014 - 2019 are 5-yr. projections based upon historical run-rates. Briefly notice how useful this chart is for comparing data across multiple lines simultaneously. It is also easy for the user to zoom to a particular area of interest by selecting that range from the smaller sub-chart directly below the primary chart. Clicking on a line label such as 'GDP' will cycle through adding and removing this line from the chart as a whole. When one such line is added/removed the frame of reference for the chart will re-adjust.
Wow! U.S. GDP has grown by 25x from less than 1B in 1962 to more than 16B in 2012. During this same time federal income tax has stayed roughly the same ranging from 15-17% of total GDP. However, the money spent has increased by about 5% of GDP from 18% to more than 23% of GDP. This means the U.S. is spending more than it raises due to taxes. What could explain this increase in expenditures?
This graph illustrates itemized total expenditures (% of total) per calendar year since 1962 for the four largest expenditure line items. The remaining ('OTHER') line items make up less than 25% of expenditures. Look at how much the U.S. used to spend on national defense. In 1962 defense spending was more than 44% of all government spending. Now, at just 11%, it is only a quarter of what it used to be. Spending in the 'OTHER' category has also fallen. It looks as though the percentage of total spending for Treasury, Social Security, and Healthcare have all substantially increased. Social Security has increased by about 50% over this period. Treasury spending has doubled. However, Healthcare has increased the most. It has increased to eight times its previous rate rising from just 3% in 1962 to over 24% of total spending.
Payments on interest to national debt and quantitative easing measures show up as expenditures towards the Department of the Treasury. A recent decline in treasury spending relates to the cease of quantitative easing. Not to take sides, but the less the government spends propping up its currency or in paying back historic debts the more money it will have to focus upon other government programs. Nonetheless, this choice could be outside the control of reasonable policy.
The big issue the effects government spending is the aging population of the U.S. As the population gets older, healthcare costs will continue to increase. We are all aware of efforts to make health insurance a public commodity. Hopefully timely measures such as these will help to curb the rising healthcare costs. This chart below is another example of the analytic power of d3. This chart shows the distribution of men (blue), women (pink), or both for each 5-year band. Use your left/right arrow keys to cycle through each decade on this chart.
In addition to the aging population, another issue effects the reason why the social security line item continues to increase. On-budget social security spending is a part of the 'OTHERS' bucket and represents just 2.5% of total expenditures. This means that the amount of money spent on social-security that is not within budget is 10x that which was planned. For example, in 2012 the U.S. spent just $83B on planned social security expenses while spending $830B on unplanned social security expenses. What could explain such a drastic increase in unplanned expenses? As the population ages this system is increasingly supported by a smaller share of people. Currently about 3 people pay into social security for every person withdrawing. By 2030 there will be just 2 people paying in per withdrawl. The social security office called out concerns about continued funding.
This is not meant to be a doomsday post, but rather it is intended to draw attention to all of the services provided through the use of tax revenue. It is also an effort to draw transparency to some of the most important issues affecting how the U.S. spends its money. My hope is that this transparency will help to inform people and policy makers how to make decisions that target long-term success. Long-term the U.S. might do as other developed nations have done and will increase the tax burden to 40% or even 50% of its GDP. Nonetheless increasing income taxes will not solve this issue since the U.S. income tax rate is among the highest in the world. Instead other taxes targeting the corporate income could promise to provide increase tax revenue without overly burdening citizens. Thoughts?
Data Sources: Historic U.S. Taxes, Global Tax Rates, U.S. Ages
Chart Sources: Population Pyramid