MONTHLY TAX FEATURES

Toward bolte r government Volume 25, Number 7, August 198 1

Founde d 1937 Tax Foundation, Incorporated 1875 Connecticut Avenue, N .W. q Washington, D.C. 20009 q 202-328-4500 q

New "Facts & First Quarter Tax Index Tops 400 Figures" Gives Fiscal Profile of American As Size of Federal Tax Bite Climbs Economy The Tax Index passed anothe r In the first quarter of this year, th e "To find the right answer, it is firs t milestone in the first quarter of 1981 , Federal Tax Index reached 412 .2, up necessary to ask the right question, " topping the 400 mark (1967 = 100) from the previous quarter by 8 .3 per- observes Tax Foundation's Chairma n for the first time, according to Tax cent, or an annual rate of 37 .6 per- Thomas M. Macioce in his Foreword Foundation economists . The Index cent. At the same time, the State - to Facts and Figures on Government rose by 6 .8 percent from the fourt h Local Index rose by 3 .8 percent, or Finance, 21st biennial edition . He quarter of 1980 for a stunning 30 . 3 16.3 percent on an annual-rate basis , continues by pointing out that "in percent annual rate of increase. At a reaching 400.0 . matters of public finance and in the level of 408.2 in this year's firs t The major taxes contributing to th e tax and fiscal arena, those question s quarter, the Tax Index was almost 1 6 latest quarterly upsurge in the Index cannot be formulated without moun - percent higher than in the same pe- were Federal social security taxes tains of statistical data . " riod a year earlier . (both the rate and base increased in And mountains of data are wha t After dipping slightly during the January) and the so-called windfall the latest major revision of Tax Foun- second quarter of last year in reaction profits tax on oil . The latter, classified dation's widely used handbook o n to the brief recession, the Index has as an excise tax, is grouped under government financial operations climbed in each of the three quarters indirect business taxes . contains. There are 250 tabulation s since. (Continued on page 2) in this edition, 40 of them brand new, containing over 51,000 entries . Some Tax Index and Related Measures of the highlights of the U .S . fiscal pro- Quarterly, at Seasonally Adjusted Annual Rates, (1967 = 100) file cited in the new Facts and Fig- ures are: Output Index • Since 1960, the portion of per- Year and Current Constant Price quarter Tax Index price prices Index ° sonal income taxable under Federal law has risen from 43 percent t 1978 I 278.1 254 .2 138 .7 183 .3 o 293.0 266 .3 141 .7 188.0 nearly 60 percent . At the end o f III 300 .3 274.0 143 .0 191 .5 World War II in 1945, only 31 percen t IV 313 .2 284 .1 144 .9 196 .0 1979 I 321 .1 292 .7 146 .3 200.1 was taxable. 325 .8 297.0 145 .7 203 .9 • Social security taxes for the me- III 336 .2 305 .7 147.1 207 .7 IV dian income family in 1980 were 344.5 312.2 147.4 211 .8 1980 I 353 .1 321 .6 148 .5 216 .6 about 10 times what they were in 349.3 320 .8 144 .7 221 .7 1959 . Last year, for every dollar pai d III 363 .4 329.8 145 .5 226 .6 IV 382 .1 341 .5 146 .9 232 .5 out in Federal income taxes, the me - 1981 I 408.2 356 .9 149 .9 238 .1 dian income family had to pay "Gross national product . another 58 cents in social security ° Implicit price deflator for gross national product . taxes. Source : Tax Foundation computations and estimates based on data from U .S. Department of Commerce , (Continued on page 3) Bureau of Economic Analysis .

ATTENTION EDITORS : Monthly Tax Features is not copyrighted . Material may be reproduced freely . Please credit Tax Foundation . 1 mists to provide a continuing mea- The Front Burner Tax Index sure of trends in taxes on a basis com- (Continued from page 1 ) parable to official indexes for othe r By Robert C . Brown There was also a significant rise in segments of the economy . Data in the Executive Vice President social insurance contributions at th e table on page 1 depict recent quar- Tax Foundation, Incorporate d state-local level . The overall index terly trends in taxes, output, an d for social insurance taxes reache d prices. "Keeping the Numbers 544.9 in the first quarter, on the 196 7 There was a significant rise in the Honest" base . This represented an enormou s nation's output in the first quarter of jump from the closing quarter o f this year, but not so great as the ris e George Bernard Shaw is supposed 1980—a rise of 10.0 percent, which in taxes. The nominal GNP index ros e to have observed that if all the econ- is equivalent to 46 .4 percent on an by 4.5 percent, an annual rate of 1 9 omists in the world were laid end to annual basis . At the Federal level, the percent. A comparison of the relativ e end they still would not reach a con- jump was even steeper; social insur - movements in taxes and GNP reveals clusion. While Shaw may have over- ance taxes climbed by 11 .3 percen t that for every 1 percent of the GNP stated the case, the tentativeness of for the quarter, a seasonally adjuste d rise, there was a rise of 1 .5 percent in the "dismal science" is real enough . annual rate of 53 .5 percent. taxes. In other words, in the firs t To find more than a handful of econ- Measured against the first quarter quarter of the year taxes rose 50 per - omists who will agree on present dat a of 1980, the Federal index for indirect cent faster than current dollar GNP . is difficult. To find any kind of con- business taxes jumped from 184 .4 to Such sharp differentials in th e sensus on future trends is well nig h 364 .9. This represented a 98 percent rates of change between the two se- impossible . advance, largely because of revenue s ries are not likely to continue in the Long-range economic forecastin g from the windfall profits tax whic h months ahead, according to Tax is a very chancy business, indeed , became effective on March 1, 1980, Foundation economists, since th e and highly subject to manipulation . according to Tax Foundation re- higher social security tax provisions If the projections do n 't fit the goals , searchers . introduced in January will stabiliz e just change assumptions until the de - The Tax Index is a fiscal yardstic k for the current year . Also, the rate of sired numbers pop out of the com- designed by Tax Foundation econo - increase in revenues from the wind - puter. This is a game regularly playe d role of the Federal social welfare fall profits tax may level off or by economists of all stripes . In Wash- structure . We must look again at the decline. ington, it has been raised to the leve l dangerous tax expenditure concep t Compared with the 408 .2 Tax In- of a fine art . and the notion of sunset . dex, the GNP index stood at 356 .9 in Looking at the out-year projection s If economic slight-of-hand ever the first quarter, the price index a t for spending and revenues, whether had a place, that time has passed . 238 .1 and the index of real outpu t in the Administration's bill or the var - Out-year projections must be accu- (inflation-adjusted GNP) at 149 .9 . ious alternatives which were debated rate or the coming debate will mean In absolute terms, first quarter 1981 before the final vote, is enough to give little . This is the only economy we've taxes for all levels of governmen t the thoughtful observer the willies . got. If there are problems down the amounted to an annual equivalent o f All things being equal, and given the road, let's see them and deal with $895 billion—$611 billion Federal , most optimistic assumptions, if ev- them. We can only do so if we keep and $284 billion state and local . erything works out just perfectly, w e our eyes open—and our numbers These figures compare to a total o f will reach the economic promise d honest. $219 billion in 1967—$148 billion in land in 1984 . How we will get there Federal and $71 billion in state and and what shape we will be in whe n About Tax Features local taxes . we arrive depends on whose projec- Tax Foundation, Incorporated, is a Taxes on income at all levels o f tions—and assumptions—you buy . nonprofit organization engaged in non - government continue to show hig h I do not mean to downgrade the partisan research and public education rates of growth, as demonstrated by on the fiscal and management aspects overall thrust of both the budget ac- of government . It is supported by vol- the Tax Index. tion and the tax restructuring that untary contributions from corporat e The index for state and local per- have taken place . Governmen t and individual sponsors, nationwide . sonal income taxes eased past the 80 0 Original material in Monthly Ta x spending had to be reined in. The Features is not copyrighted and may b e mark in the first quarter of 1981, u p wealth of the nation should be re - reproduced freely . Please credit Tax by 20 .6 percent over the same quarter turned to, or left with, those who cre - Foundation, Incorporated . Members o f of last year. The index for persona l Tax Foundation are urged to pass thei r ated it through productive labor . A copies of Tax Features along to editors income tax receipts reached 462 .9 in strong national defense is clearly of their House publications . the first quarter—429 .8 for Federa l mandated. For additional information, write t o and 801 .0 for state and local govern- Tax Foundation, Incorporated, 187 5 However, the easy cuts have all Connecticut Avenue, N .W ., Washing- ments . In dollars, this amounted t o been made. We must yet ask difficul t ton, D .C . 20009, or call (202) 328-4500 . $327 .0 billion-$276 .6 billion at the policy questions about the size and (Continued on page 4 )

2 only $53 billion . Also, in 1979, thes e New Facts & Figures Profiles U.S. units issued a record $42 billion in (Continued from page 1 ) new long-term debt. • Residents of the combined New • Total medical public assistance York, Chicago, and met - —Medicaid—came to $19 billion in ropolitan areas pay about 15 percent 1979, of which California and New of all Federal taxes—over $50 billion York received nearly a third—abou t to Uncle Sam annually . $6 billion. • Wyoming received less Federa l • Public employees covered by grant money than any other state i n state-administered retirement sys- 1980—about $191 million. New York tems contribute about 20 cents pe r received the most—$9 .6 billion, for dollar of the funding of pensions . which it paid only $7 .3 billion of the Earnings on investment of the fund s taxes required to fund Federal grants . account for another 33 cents . The bal- • Federal personnel compensatio n ance of 470 per dollar comes fro m and benefits in 1980 hit $118 bil- state and local governmen t lion—$77 billion for civilian employ - budgets—in other words, from the ees and $41 billion for the military . taxpayers. In 1975, total personnel costs for both • Cash and security holdings by civilian and the military totaled $7 7 state-administered public employee billion . retirement systems totaled over $12 5 • In 1979, state and local units i n billion in 1979. Alaska paid more per capita than any • The average weekly unemploy- other state for education, highways , ment check in 1979 came to $89 .67 , and financial administration . That The 21st biennial edition of compared to $32 .87 in 1960. same year, the District of Columbi a Facts and Figures on Govern- • During the 1973-75 recession , paid more per capita than any stat e ment Finance is currently avail - unemployment benefits doubled in a for public welfare, health and hospi - able from the Tax Foundation . single year, jumping from $6 billio n tals, and police and fire protection . Included in the new edition to $12 billion, nationwide . Besides Alaska, the states of Wyo- are 250 tabulations of statistics • In 1979, over 105 million week s ming, the Dakotas, West Virginia , on Federal, state, and local gov- of unemployment were compen- and Montana spend most on high- ernment and selected economi c sated . In the 1975 recession year, ove r ways per capita. series, including 40 new tables 175 million weeks were compen- • Indiana has the lowest level o f on key areas ; a glossary; an in- sated . The low point in unemploy- state and local spending per $1,000 dex; and notes . There are over ment payouts for the last two decade s of personal income-$146 . Missouri , 300 pages, arranged in six sec- occurred in 1966, when 47 millio n with $155 per $1,000 of personal in- tions, each with its own table o f weeks were compensated . come is second lowest. contents . • In the 1970s, an average of nearl y • State and local governments na- The Foreword was written b y 350,000 unemployment claims wer e tionwide spend $24 per $1,000 o f Thomas M . Macioce, Chairma n filed annually. personal income on public welfare . of the Tax Foundation . • Government transfer payments t o Arizona spends least, $8 per $1,00 0 Copies of Facts and Figures persons—i.e ., payments not matche d of personal income in 1979, largel y on Government Finance—21st by current production—almost qua- because it is the only state in th e edition—can be ordered from drupled from 1969 to 1979 . About Union not participating in the $20 - Tax Foundation, Incorporated , three-fourths of the $240 billion s o odd-billion-a-year Medicaid pro - 1875 Connecticut Avenue , spent in 1979 represented payment s gram. N .W., Washington, D .C. 20009 . under "social insurance" programs , • Government in Nebraska de- The cost of the new edition i s such as social security, Medicare , pends on local financing for 44 per - $15. and unemployment benefits. More cent of its revenues—more than any • In Hawaii, over 75 percent o f than half went for retirement pro - other state. government finances are concen- grams, largely OASDI and govern- • State and local governments de- trated in state, rather than local gov- ment employee pensions . pend on the Federal government fo r ernment units. This is the highest ra - • "Baby Boomers" will dominate 22 percent of their general revenue . tio of state to local government in the the labor force in 1990 . At that time , In 1979, local governments received nation. workers between the ages of 25 an d $209 billion in general revenue, of • State and local governments i n 44 will account for about 55 percent which only $117 billion came from the United States owed more tha n of the labor force, up from 44 percen t local revenue sources ; the rest came $300 billion in outstanding debt a t in 1978. from Federal and state aid. the end of 1979 . In 1957, they owed (Continued on page 4)

3 14 percent of the number of firms, but put to fixed capital formation in 197 9 Facts & Figures garnered 86 percent of all busines s than did the United States . The U.S. (Continued from page 3) receipts. figure was 19 .0 percent, compared to • The number of persons below • Productivity (output per person - 18.7 for Italy and 17 .6 for the Unite d the poverty level declined dramati- hour) of American workers in the pri - Kingdom. In Japan, the proportio n cally from 1959 to 1979-from 39 .5 vate business sector declined in 198 0 was 31 .6 percent. million to 25.2 million, or 36 percent . for the third year in a row. Compen- • Public and private wealth in the Thus, the incidence of poverty wa s sation per hour, however, increase d United States, as measured by the net almost cut in half-from 22 percen t by more than 30 percent in the same stock of fixed reproducible tangibl e of the population in 1959 to about 1 1 period. wealth, amounted to some $6.7 tril- percent in 1979. For heads of familie s lion at the end of 1979 . More tha n • The rate of growth in productiv- $2.2 trillion of this, about one-third , living on farms, the poverty rate fel l ity in the United States has been th e from 45 percent to 11 percent durin g was in the form of private residentia l slowest among major industrial na- structures . Government wealth was the same time span. tions, averaging 2 .2 percent a year • put at about $1.6 trillion, largely in The effective rate of Federal and since 1967 . In contrast, productivity state income taxes on profits of non - the form of nonresidential buildings . in Japan has increased at an annua l Facts and Figures on Governmen t financial corporations was fairly con - rate of 7 .2 percent. stant in most years during the decad e Finance, 21st edition, is availabl e of the 1970s, at close to 50 percent- • Only Italy and the United King- from the Tax Foundation . Single cop- give or take a percentage point or dom devoted a smaller share of out- ies are $15 . two. The range between the two ex- treme years, however, was rathe r component of the corporate profit s large-from 46 percent in 1972 to 66 Tax Inldex tax reached 533 .8 in first quarter percent in 1974 . (Continued from page 2) 1981, up from its 1980 recession low • Of the 14.5 million active firms of 431 .9. filing income tax returns for 1976 , Federal level, and $50 .4 billion at the The accompanying tables reveal more than 11 million were single pro - state and local level. recent quarterly trends in the overal l prietorships . Among them, 8 million Taxes on corporate profits re - Tax Index, as compared with output had annual receipts below $25,000. bounded to an index of 278 .3, up and prices, along with annual data In the same year, the 2 .1 million ac- from 220.1 in last year's second on the components of the Index fo r tive corporations accounted for only quarter recession . The state-local selected years since 1960 .

Currently Available Tax Index by Level of Government and Type of Ta x "Memorandum on the Allo- Selected Periods 1960-1981 " cation of the Federal Tax Bur - Index Numbers, 1967 = 100 den and Federal Grants-in-Aid by State, Fiscal Year 1981, 6 Type of ta x 1960 1970 1975 1980 1981 ° pages, single copies free . All governments "Allocating Tax Burdens an d All taxes 61 . 9 132 .2 204 .3 362 .1 408 . 2 Government Benefits by Incom e Personal income 62 . 8 141 .5 203 .3 418 .9 462 . 9 Corporate profits 69 . 9 105 .2 155 .9 253 .7 278 . 3 Class, 1972-73 and 1977, " Gov- Indirect business taxes' 65 . 4 134 .7 199 .5 297 .1 345 . 1 ernment Finance Brief No Social insurance contributions 48 . 7 135 .0 257 .0 475 .2 544. 9 . 31 , All other d 61 . 4 123 .2 164 .4 226 .4 231 . 1 31 pages, $2 .50 . Federal government "The Reagan Budget for Fis- All taxes 64 . 3 127 .5 191 .0 359 .6 412 . 2 cal 1982-A Summary, " A Tax Personal income : 65 . 0 138 .1 187 .7 390 .0 429. 8 Corporate profits 71 . 4 102 .0 145 .1 233 .8 257 . 4 Foundation Special Report, Indirect business taxes` 86 . 0 119 .3 145 .9 237 .6 364 . 9 , 27 pages, $1.00. Social insurance contributions 48 . 1 134 .3 257 .7 475 .5 549 . 1 All other d "The Congressional Budget 57 .4 120 .1 159 .4 215 .3 208 . 8 State and local governments Process at the Crossroads" b y All taxes 56 . 9 142 .1 232 .1 367 .2 400 . 0 Maynard H. Waterfield (Spe- Personal income 40 . 3 176 .6 362 .8 713 .6 801 .0 cial Report), , 1 4 Corporate profits 50 . 9 144 .5 287 .9 497 .1 533 . 8 Indirect business taxes` 59 . 4 139 .2 215 .1 314 .4 339 .4 pages, $1.00. Social insurance contributions 51 . 6 138 .9 252 .8 473 .3 522 .9 "Tax Policy, The Budget, and All other" 65 . 2 126 .0 168 .9 236 .6 251 .6 Unemployment," Proceedings "Most taxes are shown on an accrual basis . 'First quarter at seasonally adjusted annual rate . of Tax Foundation's 32nd Na- 'Includes sales, excise, and customs levies, and real property taxes (including those on owner-occupie d homes) . tional Conference, 64 pages , 'Estate and gift and personal property taxes . $5 .00. Source : Tax Foundation computations and estimates based on data from U .S . Department of Commerce , Bureau of Economic Analysis .

4