The following is an excerpt from our short course entitled “What Could Governments Do for Us?” In this post, we discuss issues related to taxation.
How much government do we want? For some parts of the world, this question is a luxury – for them, the question is, “How much government can we afford?” Governments cannot expect to sustainably collect much revenue in countries with little natural wealth, little to trade, and small, poorly educated populations often unable to work due to frequent illnesses. Together, these factors form a government’s tax base. After that, there is the matter of tax and tariff rates and tax compliance.
How do we want to pay for the government we want? Tax and tariff rates are a matter of policy choice. In the U.S., as the table below shows, the mix of taxes and tariffs funding the federal government has changed a lot over time. Corporate and personal income taxes now dominate excise taxes and tariffs. Total federal revenue as a share of GDP increased sharply in World War Two and has stayed high ever since.
| Federal Revenue Sources as Percent of Total | 1915 | 2022 |
| Tariffs on imports (foreign goods) | 30.1 | 2.0 |
| Excise tax on domestic goods | 48.1 | 1.8 |
| Corporate income tax (introduced 1909) | 5.6 | 8.7 |
| Personal income tax (introduced in 1913) | 5.9 | 53.7 |
| Social security tax (introduced 1935) | .. | 30.3 |
| Miscellaneous | 10.3 | 3.5 |
| Total | 100.0 | 100.0 |
| Memo item: Total as Percent of Gross Domestic Product | 1.7 | 19.6 |
Source: U.S. Treasury and MeasuringWorth.com for 1915 GDP.
You can compare the U.S. with various other countries on tax and tariff statistics by using the links below:
- Click here to see a map from Compare Your Country showing how much revenue governments collect in various countries.
- Click here for a map from Compare Your Country showing corporate tax rates in various countries.
- Click here to see average tariff rates by country from MacroTrends.net.
Some people will try to evade their government’s tax and tariff policies. Successful tax compliance depends upon government legitimacy and administrative capacity, especially if tax and tariff rates are high.
- Low government legitimacy often reduces tax compliance.
- High quality of tax administration – good customer service on the one hand and strong audit capacity backed by penalties for evasion on the other – often increases tax compliance.
Government policies can help. Improvements in the tax base, tax administration, and government legitimacy will allow either of these two policy options: (1) reduce tax and tariff rates without losing revenue, or (2) spend on more or better government services. See also a third option, debt reduction, in a future post.
- Tax bases can be improved, at least over the medium-term, by investing in the education and health of the population, by encouraging and rewarding innovation, and by seeking foreign trade opportunities.
- An important consideration in this regard is whether economic growth – people’s take-home pay and business profits – is more helped than hurt by the combination of tax and tariff policies and government services.
- The quality of tax administration can be improved fairly rapidly by adequate staffing, better training, better procedures, and investments in better technology.
- Government legitimacy can be improved in several ways:
- First and foremost, by ensuring the government represents, and is accountable to, all its citizens through regular, free and fair elections.
- Equally important is being responsive to citizens, getting good results, and solving the problems that most matter to them. Exactly what those things are varies from country to country and can change over time.
Of course, lower spending can also reduce the need for revenues. Spending reductions could come from efficiency gains, fewer services, or lower quality services.
The next post in this series will cover government deficits, borrowing, and debt service.
To see the full short course, click on the blue link “What Can Governments Do for Us?“
We offer several other short courses on the U.S. system of government. You can find them here: https://cffad.org/topics/
