MONTHLY TAX FEATURES

Volume 23, Number 5, May 1979 TOwir 0 boile r government

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U.S. Indebtedness Profiled Energy Problem Federal Debt Totals Public Indebtedness Can Be Solved, $3,528.28 Per Capita Passes $1 Trillion GM's Estes Says The United States government owe s Public debt—gross debt of Federal, a great deal of money, and the natio n state and local governments—in 197 8 U .S. energy problems are mostl y is getting further into debt each year , amounted to $4,811 for each man , self-caused and can be self-cured, Elli- according to analysis just released b y woman, and child in the Unite d ott M. Estes told a group of Pittsburgh the Tax Foundation . The total Federa l States, according to estimates by Tax business leaders, Monday, May 14 . debt stood at $771 .5 billion as of Sep- Foundation economists . This was al - Speaking at a luncheon sponsored b y tember 30, 1978, indicates Facts an d most twice its size ($2,420) as recent- the Tax Foundation and hosted b y Figures on Government Finance, Twenti - ly as 1969 . David M. Roderick, Chairman of U .S . Steel and President of the Founda- eth Edition, the Foundation 's widely Total public indebtedness, whic h tion' s Board of Trustees, Estes said , used reference work on public fi- passed the $1 trillion mark at the en d "Since our difficulties are largely of nance. That figure is but a point at th e of fiscal year 1978, is one of the many our own making-OPEC notwith- top of a long, mostly ascending growt h facets of public finance documente d standing—it is fully within our pow- curve which the Foundation's econ- in the Foundatio n's forthcoming Fact s er to unmake them . " omists trace back to 1902, in th e and Figures on Government Finance, Part of the solution, according t o forthcoming volume. Twentieth Edition, due off press i n June. the GM president, is that there is On the eve of World War I, the Fed- "plenty of energy in this country i f eral debt totaled $1 .3 billion . This Of the $1 .05 trillion worth of deb t we're willing to pay its price ." He pre - amounted to $12.36 for each Amer- incurred over the years by all levels o f dicted that higher prices would b e ican citizen. The high cost of the Grea t government, Federal indebtednes s needed, and said the proceeds shoul d War had pushed the Federal debt t o claims the lion's share: $771.5 billion, go "to the producers for plow-back $26.6 billion by August 31, 1919 . Re- or 73 .4 percent of the total . Th e into additional production. " covery came with the economic boo m second largest amount was owed b y In a wide-ranging assessment o f of the Roaring Twenties, so tha t local government units—$179.9 bil- American industry 's ability to com- money owed by Washington droppe d lion, or 17 .1 percent of the total. State pete at home and abroad, Estes ques- to $16.0 billion on December 31, 1930 , government was a not-too-close third , tioned whether international trade an obligation of $129 .66 for each man , with 9.5 percent of the gross publi c was always free or fair, charging that woman, and child in the United States . debt, a total of $99 .9 billion. "government policies often give over- The Depression had ratcheted in- In the early part of this century , seas businesses a 'more equal' chance debtedness three-fold by the eve o f according to the Foundation 's analy- to win the customer's favor than U.S . World War II, when the figure hit sis, local debt was by far the mos t business . " $48.5 billion on June 30, 1940 . World significant component of public indebt - "Taxes in this country today, " he War II skyrocketed the nation's out - edness, accounting for 57.1 percent o f told the corporate executives, "pose a standing obligations, leaving the Uni - monies owed in 1902 . In 1913, local potential double whammy for busi- ted States government nearly $280 bil- debt continued to lead the pack, climb - nesses trying to compete on a globa l lion in arrears by February 28, 1946 . ing to 72 percent of gross debt—$4 .0 basis ." (Continued on page 2) (Continued on page 4) (Continued on page 4)

ATTENTION EDITORS : Monthly Tax Features is not copyrighted . Material may be reproduced freely . Please credit Tax Foundation .

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Who owns the debt? Non-hank in- IRS Spends 49(G Federal Debt vestors (individuals, insurance com- (Continued from page 1) panies, mutual savings banks, corpo- For $100 Taxes rations, state and local governments , Some easing in that figure occurre d foreign and international investors ) during the immediate postwar years , have the largest claim on the Federa l The U.S. government spends onl y so that the Federal debt had decline d government-$393 .0 billion. Of that 49 cents to collect $100 in Federa l to $251 .6 billion by April 30, 1949 . group of debt-holders, $121 .0 billion- taxes, according to the 1978 Repor t From that date on, however, Ta x or 31 percent-is owed to foreign an d of the Commissioner of Interna l Foundation research records a rise i n international owners of Federal securi - Revenue. While taxpayers may b e 27 of the ensuing 29 years . (In the two ties. happy that tax collecting is s o years following the Korean War, the cost-efficient, they may not be awar e Banks-Federal Reserve and com- debt declined slightly .) In 1978 Fed- that costs incurred by those wh o mercial banks-hold a total of $210 . 1 eral debt was over three times th e must file tax forms may be consider- billion in Federal obligations . The re- lowest level of post-World War I I ably higher, according to the Tax maining Federal securities are held b y debt. Foundation . This is particularly tru e the U.S . government, which has of the business sector. Today, the government owes on $168 .0 billion worth of them in it s In fiscal 1979, the Tax Foundation behalf of each resident of the Unite d investment accounts. estimates that more than 87 cents ou t States $3,528 .28 (as of September 30 , The accompanying table, reprinted of every dollar of Federal taxes will h e 1978) . from Facts and Figures on Govern- collected by or from business firms, The interest on that debt comes to ment Finance, Twentieth Edition , Gross Federal tax collections (befor e $48.7 billion, contrasted with only shows the course of the Federal deb t refunds) in 1979 are estimated at ove r $25 million in 1917 . for selected years . $469 billion. Of this amount, busines s will hand over about $410 billion t o Uncle Sam, either from taxes levie d on business operations-corporate in - come, employment, unemployment, Course of the Federal Deb t etc.-or from taxes levied on individu - As of Selected Dates 1917-1978 als but withheld or collected by busi- (Millions, except Per Capita) ness in the first instance . Here is a breakdown of these taxes :

World War I World War II Post World War I I Amoun t Tax (billions)

Debt Corporate income $ 75 .9 Prewa r Highest Post precedin g Lowest Individual income debt wa r World War I defense Highest postwa r (withheld) 185 .5 Mar . debt low deb t program war deb t debt Deb t Social securit y 31 , Aug . 31 , Dec . 31 , June 30 , Feb. 28, Apr. 30 Sept . 30 , (employee and Item 1917 1919 1930 1940 1946 1949 197 8 employer share) 119 .7 Unemployment 3 . 1 7 Total debt $1,282 $26,597 $16,026 $48,497 $279,764 $251,553 $771,544 Excise 18. Direct (gross) 1,282 26,597 16,026 42,968 279,214 251,530 770,923 Customs 7 .5 Guaranteed''''' 5,529 551 23 62 1 Interest-bearin g Of these gross tax collections, som e debt, total 1,023 26,349 15,774 47,874 278,451 249,528 767,592 $26 billion, a little over 5 percent o f Direct 1,023 26,349 15,774 42,376 277,912 249,509 766,97 1 Guaranteed 5,498 539 19 62 1 the total, will be refunded to tax- Per capita tota l payers . debt s 12 .36 250 .18 129 .66 367 .08 1,989 .75 1,690 .29 3,528 .28 General fun d In 1978, the Internal Revenue Ser- balance 74 1,118 307 1,891 25,961 3,995 22,444 vice processed 136 .7 million tax re - Computed annua l interest rate o n turns . The large majority-100 .8 mil- interest-bearin g lion-were income tax returns ofindi- debt, total : (percent) 2 .40 4 .20 3 .75 2 .51 1 .97 2 .24 n.a . viduals and businesses . The secon d Direct 2 .40 4 .20 3 .75 2 .58 1 .97 2 .24 7 .1 3 largest category-25 .5 million returns- Guaranteed - - 1 .98 1 .35 2 .36 n .a . Federal interes t was represented by employment tax - payments fo r es. Operating costs of the IRS in 197 8 the fiscal year. . . . 25 1,020 612 1,041 4,722 5,339 48,695 were put at $1 .96 million. a Excludes obligations owned by the Treasury . While there are no definitive esti- e dncludesoutstanding matured principal of guaranteed debt of U .S. government agencies, cash for payment o f mates of the value of the time taxpay- which is held by Treasury in the general fund balance . cl3ased on population including armed forces overseas . ers spend on their tax returns, variou s Source : Treasury Department . (Continued on page 4)

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State Income Taxe s Sales Taxes Furnish Most State Income Claiming Larger Share General sales taxes continued to be This latest edition of the Founda- of Income Tax Dollar s the leading source of state tax reve- tion's widely used reference boo k nue in fiscal year 1978 (last reported) shows that general sales taxes firs t For every $100 the Federal govern- for the thirty-fifth consecutive year . rose to the top spot in state tax struc - ment collected in corporate and in- But, according to Tax Foundation econo - tures in 1944 . In that year they pro- dividual income taxes in 1978, the mists, individual income taxes will vided about 18 percent of state gen- states gathered in nearly $17, accord- overtake sales taxes within a few eral tax revenues . By the late 1960s, ing to Tax Foundation economists . years if recent trends continue. sales taxes were furnishing close t o 30 percent of the total. In the last Ten years earlier, the states got These findings are based on his- decade, however, this portion ha s only $9 for every $100 the U .S . re- torical data appearing in Facts and risen only slightly-to 31 percent in ceived from income taxes. Figures on Government Finance, Twenti - 1978. Corporate and individual income eth Edition, which the Tax Founda- tax payments to Federal and slate tion will publish in June . Over the same period, individua l governments in 1978 totaled $280.8 income tax yields have climbe d in 1969, New Hampshire in 1970, and billion, an increase of 165 percent from about 8 percent of all state tax Florida and Ohio in 1971 . Although from 1968. But these state-level levie s collections in 1944, to 17 percent in no new corporate levies have bee n rose by 357 percent, more than twic e 1968, and to almost 26 percent in enacted since 1971, state corporat e the 147 percent increase in Federa l 1978. income taxes have continued to gro w income taxes . (Not counted in these m more rapidly than the Federal tax, ris- In the last five years, while genera l comparisons are local revenues fro ing from percent of the Federa income taxes, now in the neighbor - 12.8 l sales taxes have risen from $19.8 bil- amount in n hood of $4 to $5 billion annually.) 1971 to 17.9 percent i lion to $35.2 billion, or by 78 percent, 1978 . individual income taxes have in- In part, the disproportionate rise i n As of 1979, there were only five state and Federal income taxes since creased by 87 percentfrom $15 .6 bil- states levying neither a personal nor lion in 1973 to $29 .1 billion in 1978 . 1968 is due to new adoptions of these corporate income tax : Nevada, South taxes by additional states (as well a s Dakota, Texas, Washington, and Wyo - State general sales taxes date bac k to some statutory reductions in Fed- ming. In addition to these states, Flor - 1932, when Mississippi became th e eral taxes) . to ida levied no personal income tax ; and first state to adopt the levy . By 1940, From 1968 to 1978 state individual Connecticut, New Hampshire, an d twenty-three states had followed income tax revenues rose from $6. 2 Tennessee taxed only limited por- suit. In the intervening years, the ta x billion to $29.1 billion, or by 367 per- tions of income (e.g., dividends, inter - has been adopted by all but five of th e cent, as compared to a rise in Federal est, capital gains). remaining states (Alaska, Delaware , individual income taxes of 163 per- In 1978, income taxes accounted fo r Montana, New Hampshire, and Ore - cent . During this ten-year period, si x 35.2 percent of all state tax receipts , gon). states adopted a new personal incom e up from 24 .0 percent in 1968. (Continued on page 4) tax levy-Illinois and Maine in 1969; Ohio, Pennsylvania, and Rhode Is - land in 1971; and New Jersey in 1976. The disparity between growth i n State and Federal Income Tax Collections state and Federal corporate levies ha s Fiscal Years 1968-197 8 been even sharper than for individual income taxes. State corporate income Individual income tax Corporate income ta x .5 billion in Ste as State as tax revenues rose from $2 Amount (billions) Percent of Amount (billions) percent o f 1968 to $10 .7 billion in 1978, or by 32 6 Fiscal year State Federal Federal State Federal Federal percent. At the same time Federa l 1968 ...... $ 6.2 $ 68.7 9.1 $ 2.5 $ 28.7 8.8 revenues from the same source ros e 1969...... 7.5 87.2 8.6 3.2 36.7 8.7 109 percent, only one-third as much 1970...... 9.2 90.4 10.2 3.7 32.8 11 .4 1971 ...... 10.2 86.2 11 .8 3.4 26.8 12.8 as the state tax. Expressed in anothe r 1972...... 13.0 94.7 13.7 4.4 32.2 13.7 way, state corporate income taxe s 1973...... 15.6 103.2 15.1 5.4 36.2 15:0 1974...... 17.1 119.0 14.4 6.0 38.6 15.6 amounted to 8.8 percent of the corre- 1975 ...... 18.8 122.4 15.4 6.6 40.6 16.4 sponding Federal tax in 1968, climb- 1976...... 21.4 131 .6 16.3 7.3 41 .4 17.6 1977 ...... 25.5 157.6 16.2 9.2 54.9 16.7 ing to 17 .9 percent in 1978. 1978...... 29.1 181.0 16.1 10.7 60.0 17.9 In the past ten years, five state s Percent change 1968-1978 +163 +325.6 +109.1 x +366.8 .3 have adopted a corporate income ta Source : Bureau of the Census, U.S. Department of Commerce; Office of Management and Budget ; and Ta x for the first time-Illinois and Maine Foundation computations.

3 Sales Taxes Estes (Continued from page 3) (Continued from page 1) NOW AVAILABL E

Individual income taxes evolve d The "first whammy" Estes de - The following publication is somewhat earlier as a source of stat e scribed as "high rates, the double taxa - currently available from th e revenue. Hawaii, while still a terri- tion of corporate profits and policie s Tax Foundation : tory, adopted an income tax in 1901. which tend to encourage consump- all of whic "A Value-Added Tax for th e Wisconsin took that step in 1911 . By tion rather than savings , " h United States? Selected View - 1932, when the state general sales tax "work to make capital formation more points." (Special Report), was first introduced in U.S. state tax difficult ." The "second whammy " $2.00. structures, 20 states were already comes from the way taxes are spent , levying individual income taxes . A s he said . "These days, they often bu y of 1978, only nine states still did not difficult rules and regulations which impose a broad-based income ta x can divert much of the capital that is Public Debt (Connecticut, Florida, Nevada, Ne w available away from research, devel- (Continued from page 1) Hampshire, South Dakota, Tennessee , opment, technology, machinery that Texas, Washington, and Wyoming) . will increase productivity." billion . State governments owed 6.8 Calling productivity the "key to ou r percent of gross debt ($379 million) . Among other trends in state taxes privileged standard of living" and With the passage of time, Federa l depicted in the new edition of Fact s "our ability to succeed in interna- and local governments have virtually and Figures are : tional competition, " Estes cited a changed places (the Federal percent - —In 1902, the earliest year reported , sharp decline in America's growth i n age for 1976 exactly matched th e total state tax revenues amounted t o productivity during the last decade . local percentage for 1913), with the $156 million. In 1978 they totaled an Even if the nation restores productiv- states continuing to owe a relatively estimated $122.6 billion. ity growth to the area of 3 percent a modest portion of the total public o r year, he said, "we will still trail bot h government debt (9 .8 percent in 1976 —In 1936, total collections, exclud - Germany and Japan ." and 9.5 percent in 1978) . ing unemployment taxes, hit $2.6 bil- Estes characterized bringing infla- Like taxes, public debt has fol- lion. Less than twenty years later , tion under control as our most "impor- lowed a generally upward trend dur- states were collecting that much — tant, immediate national goal ." Stress- ing this century. However, the upward and more ($2 .64 billion)—in general ing that GM has been supportive o f trend was briefly reversed in the sales taxes alone . the Administration's wage-price con- years immediately following Worl d —At the turn of the century prop- trols, he charged that no such effor t War II . The biennial pattern for tha t erty taxes brought in over half of stat e can succeed "without monetary and period was : 1946, $285.3 billion; 1948, tax revenues. The property levy re- fiscal restraint and responsibility by $270.9 billion; 1950, $281 .4 billion; mained the largest single revenue Washington ." and 1952, $289.2 billion. source until the early 1930s, when the "Washington, " the GM chief told Facts and Figures on Government states relinquished the lion' s his audience, "is where inflatio n Finance, Twentieth Edition, is avail- share of this tax to localities . starts. That is where its flames ar e able for $10 from Tax Foundatio n fanned by continued deficit spending . —Following the demise of the prop- And that is where we must begin ou r erty tax as a state levy, motor vehicl e efforts to end it—by shutting dow n fuel sales became the major state tax the printing presses for awhile . " About Tax Features source, bringing in over 28 percent of Tax Foundation, Inc., is a publi- revenues in 1934 . With the spreadin g cly supported, non-profit organiza- tion engaged in non-partisa n adoption of general sales and income Tax Costs (Continued from page 2) research and public education on taxes in the states, motor fuels sale s the fiscal and management aspect s as a tax source fell to 17 percent of th e estimates indicate that these costs ar e of government. Members of Ta x total by 1944. substantial . A report of the Genera l Foundation are urged to pass thei r Accounting Office in 1978, for exam- copies of Tax Features along t o —In 1932, motor-vehicle-relate d ple, reported that "the IRS estimate editors of their house publications . s Original material in Monthly Tax taxes provided nearly 46 percent of all that its reporting and recordkeepin g state tax revenues . These represented Features is not copyrighted and requirements result in about 613 mil- may be reproduced freely by the the total of fuel sales taxes and moto r lion hours of burden annually on busi - news media and others . Please vehicle and operator's licenses. nesses and individuals ." At a mere $5 credit Tax Foundation. —In 1978, two-thirds of state taxes an hour, these costs would add up t o For additional information writ e to "Tax came from the levies on general sales. Foundation, 1875 Connecti- over $3 billion a year, half again more cut Avenue . N. W.. Washington. corporate income, and personal in - than the IRS's collection costs, say s D.C. 20009 . or call (202) 328-4500 . come. the Tax Foundation.

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