Research Aid No. 4

The, Tax Burden

In - Relation To

National Income and Product

Copyright 1957 b y

TAX FOUNDATION, INC .30 Rockefeller Plaza, New York 20, New York

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BOARD OF TRUSTEE S

ORVAL W. ADAMS ROY C. INGERSOL LExec . Vice President, Chairman, Borg-Warner Corp .First National Bank of Salt Lake City

ROSWELL MAGILLELLSWORTH C. ALVORD Cravath, Swaine & MooreAlvord & Alvord

WALTER T . MARGETTS, JR .GEORGE D . BAILEY Forstmann Woolen Compan yTouche, Niven, Bailey & Smart

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CHARLES T. FISHER, JR . H. W . PRENTIS, JR .

President, National Bank of Detroit Chairman, Armstrong Cork Compan y

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JAMES M . $MME SEDMUND L . GRIMES President, Pennsylvania Railroad CompanyPresident, Commercial Credit Company

Louis J . TABE RJOHN W. HANES President, Farmers & Traders Life Insurance Co .Olin Mathieson Chemical Corporation

OFFICER S

F. PEAVEY HEFFELFINGER Chairman, Union Oil Company of CaliforniaPresident, F . H . Peavey & Company.

CLOUD WAMPLE RH. J . HEINZ, II Chairman, Carrier CorporationPresident, H . J . Heinz Company

DR. ROBERT E. WILSONCHARLES R . HOOK Chairman, Standard Oil Company (Indiana )Chairman, Armco Steel Corporation

BEN H. WOOTE NB. E. HUTCHINSON President, First National Bank in Dalla s

JOHN W . HANES

CHARLES R. HOOK

HERBERT J. MILLE RChairman

Vice Chairman

Executive Directo r

ROSWELL MAGILL

S . SLOAN COLT

ALFRED PARKE RPresident

Treasurer

Secretary

FOREWORD

The $72 billion Federal budget presented in January 1957 stirred anewdiscussions of the relationship of Federal expenditures and taxes to national incomeor product, as well as questions involving the definition of items in the nationa lincome and product accounts .

This Research Aid deals with the appropriateness of various incomeseries in measuring the total tax burden . Specifically, it is concerned with th equestion, should the tax burden be expressed as a percentage of total taxes t onational income, gross national product, net national product or personal income ?All four of these national income and product totals published by the U. S . Depart-ment of Commerce, as well as other income concepts, are currently being used t oindicate "how much of our total income the government takes . "

This study concludes that for general purposes the net national product i sthe most appropriate base on which to measure the total tax burden . But the studyis also concerned with the limitations of any over-all ratio of taxes to income .

While it is relatively easy to define "taxes," it is much more difficult t odefine "income ." For example, do indirect business taxes themselves represent apart of our total income out of which taxes may be paid? The sources from whic htaxes may come cannot in fact be exactly delineated . To assign the sources of ta xrevenue for statistical purposes involves the uncertain matters of the incidenceand effects of taxation . , The study urges an awareness of the assumptions involve din statistics which provide deceptively simple answers to such questions .

The severity of the tax burden depends in, part upon the uses to which th etax revenue is put. Some expenditure programs involve more "taking away" thanothers . Examination of the weight of the tax burden demands consideration of th eexpenditure side of the accounts . This is particularly true of comparisons ove rlong time periods and as between different countries where differences in th emake-up , of expenditures and taxes may be as important as the totals .

The study warns that, while the percentage of taxes to national product i sa useful summary figure, the role of the government in the economy cannot b eaccurately or adequately described by a few over-all statistical measures .

Tax Foundation, a non-profit organization, is engaged in research o ngovernment spending and taxation . Its purpose is to aid in the development ofmore efficient government at less cost to the taxpayer . It also serves as anational information agency for organized taxpayer and research groups through -out the country .

TAX FOUNDATION

September 195 7

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CONTENTS

Page

Introduction 5

I. National Accounts Series and the Measurementof the Total Tax Burden

7

A. Should Taxes be Compared with Gross or Net National Product? 7B. Should Taxes be Compared with National Income? 8C. Should Total Taxes be Compared with Personal Income? 1 0

II. Are All Taxes Paid by Individuals? 1 6

III. How Much Income is "Taken" by the Government? 1 7

IV. Reliability of the Statistics 19;i

V. Summary and Gonclusior} 2 1

TABLES

1 . Effect on Apparent Weight of the Tax Burden of a Shiftfrom Indirect to Direct Taxation 9

2. Indirect Business Taxes in Relation to Total Tax Receipts ,Calendar Years 1929-1956 1 1

CHART

1 . Federal, State and Local Tax Receipts as a Percent ofGross National Product, Net National Product, and NationalIncome, Calendar Years 1929-1956 1 2

APPENDIX TABLE S

Al . Gross National Product, Net National Product, NationalIncome, Federal and State and Local Tax Receipts ,Calendar Years 1929-1956 2 2

A2. Total Tax Receipts as a Percentage of Gross Nationa lProduct, Net National Product, and National Income,,Calendar Years 1929-1956 2 3

A3 . Gross National Product and Government Expenditures forNational Security, Other Goods and Services, Interes tand Transfer Payments, Calendar Years 1929-1956 24

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THE TAX BURDEN IN RELATION TO NATIONAL INCOME AND PRODUC T

Introduction

Most of us have an understandable desire to find out "how much of ou rtotal income the government takes ." At first sight it might appear that this ca nbe determined simply by expressing the total of taxes collected or paid as a per-centage of national incorne . But a longer look discloses numerous difficulties inthe use of such a ratio . Current practice is far from uniform . The total taxburden is expressed variously as a percentage of gross national product, ne tnational product, national income, personal income, and still other totals of incom eor product .

The purposes of this study are to consider what income or product tota lis most appropriate in measuring the tax burden and to examine certain limitation sof an overall "effective rate" of total taxes to income .

As defined in the national income accounts, national income is the total o fall incomes paid out for the production of goods and services . National income isalso, by definition, equal to the net value of all goods and services produced whe nvalued at "factor prices ." Factor prices are the prices paid for the services o flabor, land, and capital (some would add "entrepreneurship") that enter int oproduction .

But goods and services produced can also be valued at "market prices, "that is, the prices of final goods and services including indirect business taxes .The term net national product is equivalent to national income valued at marke tprices .

Gross national product exceeds net national product by the amount ofcapital consumption allowances . Capital consumption allowances consist chiefly o fdepreciation charges .

The relationship between gross national product, net national product, an dnational income in the calendar year 1956 was as follows : 1

(Billions )

Gross National Product $414 . 7Less : Capital Consumption Allowances 34. 3Equals : Net National Product 380 . 4Less : Indirect Business Taxes

(and Nontax Liability) 35 . 0Other Adjustments 1 . 8

Equals : National Income 343 .6

1 . Department of Commerce, Survey of Current Business, July 1957, p . 11 .

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Indirect business taxes, as defined in the national income and produc taccounts, include sales and excise taxes, property taxes, and miscellaneou sbusiness taxes . Since home ownership is classified as a business in the nationa lincome accounts, indirect business taxes include property taxes on home owners .More generally, indirect business taxes are defined as those "chargeable to curren tcost by business enterprises .11 2 They are also defined as those taxes which ar epart of, or shifted into, market prices . 3

2. National Income 1954, a Supplement to the Survey of Current Business, U. S .Department of Commerce, p . 55 .

3. Ibid . The justification of the distinction between indirect and direct taxes o nthe basis of incidence is much less strongly stated in this edition than in the1947 edition . Cf. National Income 1954 p . 40, and National Income Supplemen tto the Survey of Current Business, July 1947, p . 12 .

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I . National Accounts Series and the Measurement of theTotal Tax Burden

As indicated above the national income and product accounts, published b ythe U .S . Department of Commerce, provide various series with which the total taxburden may be compared . Should the tax burden be compared with the gros snational product, with the net national product, with the national income, withpersonal income, or with some other income or product series? As a base o nwhich to measure the tax burden, each income or product total has certain limi-tations .

A. Should Taxes be Comparea with Gross or Net National Product? 4

A comparison of taxes with gross national product would imply that par tof the tax burden might be met out of capital consumption allowances . In fact, eco-nomic resources may be diverted from maintaining capital equipment to genera lgovernment uses . There is little doubt that this occurred during World War II . Inthe years 1942-1945 capital consumption allowances exceeded gross private do-mestic investment . In other words, financial allowances for depreciation in thos eyears were not fully used for capital replacement and may have contributed t omeeting tax bills . However, the wartime diversion of resources from replacingprivate capital equipment to war purposes was achieved not so much through taxa-tion as through direct wartime controls .

In the post World War II years the understatement of depreciation allow-ances, as a result of the use of the original cost basis in a period of inflation, mayhave had some effect on the level of gross investment and on capital replacement .The immediate effects of understated depreciation allowances support the argumen tthat part of the tax burden may be met by diverting resources from maintenance ofcapital to government uses . For understated depreciation allowances mean over -stated net incomes and tax bills larger than they otherwise would be . Conversely ,accelerated depreciation is a device to stimulate gross investment through condi-tional tax reduction.

However, it is difficult to measure such effects and even, at times, to tel ltheir direction . Moreover, these effects are not ordinarily part of the intende deffects of taxation . Apart from wartime emergencies, it would not make sense t odesign policies that would divert resources from maintaining private capital equip-ment to general government uses . In a wartime emergency it is the gross produc tthat is relevant in considering how much of the economy's resources can b ediverted to war purposes, whether by taxation, borrowing or other means . But i nthe long run, capital equipment must be maintained or the productive capacity o fthe economy will be reduced . It is therefore more appropriate to relate the ta xburden to net national product than to gross national product .

4 . The treatment of this question is not extended here to the relation of governmen texpenditures to national product . An analysis of the expenditure side wouldinvolve further problems of definition such as the treatment of depreciation o ngovernment assets . For comments on the expenditure side, see below pp . 17-1 8

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It should be noted that deficiencies in the estimates of capital consumptio nallowances limit the. accuracy of measures of the tax burden as a proportion of ne tnational product . Estimates of capital consumption allowances are subject to aconsiderable margin of error . These allowances consist largely of depreciatio ncharges, and "In general, the valuation of these charges reflects the type of ac -counting practices pursued under internal Revenue Service regulation~ ." 5 In I95 4 ,Mr . George Terborgh estimated that "American industry is receiving in deprecia-tion allowances $7 billion a year less than it is realistically entitled to ." 6 On th eother hand, in the early 1930's the use of original cost basis for depreciation pur-poses probably produced an overstatement of depreciation allowances .

B . Should Taxes be Compared With National Income ?

Are taxes paid out of total product or out of total income? The differenc ebetween net national product and national income, as defined by the Department o fCommerce, is indirect business taxes . As stated above these taxes can be regardedas that part of the total product which goes to the government without first becom-ing part of the payments to the factors of production . It appears then that we havehere a relatively simple matter of terminology . The government "takes" a part ofour total product that the Department of Commerce does not define as part of ou rtotal income . It would therefore be overstating the weight of the tax burden torelate taxes to national income rather than national product .

Moreover, in using the Department of Commerce concepts it is not con-sistent to express total taxes as a percentage of national income over two or moreperiods (or two or more countries) in which the proportion of direct and indirec ttaxes is different . For a change in the proportion of indirect to total taxes change sthe proportion of total product that is defined as national income The weight of th etax burden, defined as a proportion of national income, therefore would change wit heach change in the proportion of direct to indirect taxes .

To illustrate, Table 1 shows the effect on the apparent weight of the ta xburden of a shift from indirect to direct taxation under two sets of assumptions .In example A in Table 1, it is assurned that in period I, $30 billion is obtaine dthrough indirect taxes, and that in period II, all taxes are direct . Insofar as pos-sible, "other things" are assumed to be the same in the two periods . But whatremains "unchanged" is the crucial point .

If it is assumed that indirect taxes affect only market prices and no tfactor prices, net national product will fall from $350 in period I to $320 in perio dII . National income, however, will remain the same . If the government collect sthe same dollar amount of taxes in period II as in period I, namely $100 billion, th e

5. National Income 1954, p . 150 .

6. Realistic Depreciation Policy, Mac''ainery and Allied Products Institute, 1954 ,p . 10 . Terborgh also points out that over the whole history of the income ta xthe requirements for depreciation accounting for tax purposes have tended t oimprove depreciation accounting for general business purposes . (p. 3) .

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Table 1

EFFECT ON APPARENT WEIGHT OF THE TAX BURDENOF A SEIFT FROM INDIRECT TO DIRECT TAXATION

(.Assumed Figures Approximating 1955 Data )

Line Item Period I Period II

Example A(Billions )

1 . Net National Product $350 $3202 . Indirect Taxes 30 -3, National Income 320 3204 . Direct Taxes 70 10 05 . Total Taxes (Line 2 plus line 4) 100 1'0 n

Total Taxes as a Percentage o f6 . Net National Product 28 .610 31 .2%7 . National Income 31 .2 31 . 2

8 . Price Index (From line 1 ; 350 = 100) 100 91 .43

sExample B

(Billions )9 . Net National Product $350 $320

10 . Indirect Taxes 30 -11 . National Income 320 32 012 . Direct Taxes 70 91 . 413 . Total Taxes 100 91 .4

Total Taxes as a Percentage of14 . Net National Product 28 .6% 28 .6%15 . National Income 31 .2 28 .6

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.tax burden increases from 28 .6 percent of net national product in period I to 31 . 2percent of net national product in period II . This reflects the fact that with thesame current dollar "tax take" the government's take in constant dollars has in -creased. On the assumption that the reduction in indirect taxes is fully reflecte din reductions in market prices, the fall in prices is 8 .57 percent (line 8) . But thetax burden, expressed as a percentage of national income, has apparently remaine dthe same .

On the other hand, if we assume as in example B, that in addition to shift-ing from indirect to direct taxation, the government reduces its current dollar ta xtake so that in constant dollars it remains the same, then the tax burden expresse das a percentage of national income apparently falls from 31 .2 percent in period I t o28 .6 percent in period II .

In sum, in the first example a real change in the tax burd :.•,i is not reflectedin a change in the percentage of total taxes to national income ; and in the secondexample, the percentage of total taxes to national income indicates a fall in the ta xburden, when the total of real taxes has remained the same . These inconsistencie salso apply to the use of the national income as a measure of economic welfare .Thus in example A the national income, if deflated for the change in prices, woul dindicate an increase in real income even though production is the same and th egovernment's real tax take has increased. ? These inconsistencies arise out of th edefinition of national income as net of indirect taxes . They indicate that nationalincome should not be used as a base on which to calculate the weight of the tota ltax burden .

Table 2 shows the large changes which have taken place over the last twodecades in the proportion of indirect to total taxes as defined in the national incomeand product accounts .

Chart I shows the total tax burden as a percentage of gross nationa lproduct, net national product, and national income, 1929-1956 . The percentages oftax receipts to gross and to net national product move closely together. Somewhatlarger variations are evident in the percentage of taxes to national income . Thelarge increase in the total tax burden obscures in Chart I the effect of changes i nthe proportion of direct to indirect taxes on the percentage of taxes to nationa lincome .

C . Should Total Taxes be Compared With Personal Income ?

The foregoing discussion implies that total taxes should not be compare dwith personal income as defined by the Department of Commerce . The relation

7 . The objection may be raised that an index of market prices should not be use dto deflate national income at factor cost . Yet it is market prices that determin ethe buying power of factor incomes . Moreover, " . . .it is impossible to separatethe effects of taxes in comparisons of prices over time or from nation t onation ." --Gerhard Colm, "The Government Sector, A Re-examination ofCentral Issues," Problems in the International Comparison of Economi cAccounts, Studies in Income and Wealth, Volume Twenty, National Bureau o fEconomic Research, Princeton 1957, p . 120 .

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Table 2

INDIRECT BUSINESS TAXES IN RELATION TO TOTAL TAX RECEIPTSa

Calendar Years 1929-195 6

Indirect Business Taxe sTotalTax

Percent of TotalYear

Receipts

Amount

Tax Receipts

Millions1929 $ 10,276 $ 6,7391930 9,761 6,88 31931 8,534 6,57 81932 8 1 001 6,4721933 8,540 6,7711934 9,676 7,53 11935 10,570 7,89 11936 12,134 8,36 11937 14,558 8,83 51938 14,180 8,82 11939 14,561 9,0361940 16,905 9,6791941 24,126 10,9381942 31,702 11,3841943 48,173 12,3091944 50,018 13, 58 11945 51,993 14,9591946 49,897 16,7341947 55,732 18,0001948 57,575 19,59 61949 54,564 20,75 71950 67,241 22,77 31951 83,294 24,5641952 88,471 26,92 71953 92,398 28 1 90 51954 87,216 28,65 31955 97,911 31,25 21956 105,602 33,337

a. As defined in the national income and product accounts . Nontaxesare excluded .

Source: Department of Commerce .

65 . 670 . 577 . 180 .979 . 377 .874 . 768 . 960 . 762. 262. 157 . 345 . 335 . 925 . 627 . 228 . 833 . 532 . 334 . 038 . 033 . 929 . 530 . 431 . 332 . 931 . 931 . 6

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FEDERAL, STATE AND LOCAL TAX RECEIPTS a AS APERCENT OF GROSS NATIONAL PRODUCT, NET NATIONAL PRODUCT

AND NATIONAL INCOM ECalendar Years 1929-195 6

Percent

Percen t

130

30

2

25

3 25

20

20

15

15

12

10 3

10TOTAL TAX RECEIPTS AS A PERCENT OF :

1. National Income2. Net National Product3. Gross National Product

5

5

0— 1 11930

1935

1940

1945

1950

1955

0a, Government receipts on income and product account less nontax receipts, Tax receipt s

are net of refunds and include contributions for social insurance ,Source : See Table A2 in Appendix,

personal income to national income is as follows (1956 data) : 8

(Billions)

National Income $343 . 6Less : Corporate Profits Tax Liability 22. 0

Undistributed Corporate Profits andInventory Valuation Adjustment 6. 6

Contributions for Social Insurance 12 .4Plus : Government and Business Transfer Payments 18 . 5

Net Interest Paid by Government 5 . 7Equals : Personal Income 326.9

Personal income excludes corporate profits taxes and social insuranc econtributions . As in the case of indirect business taxes, these taxes represent ashare of the national product which goes to the government but is not included 'i npersonal income as defined by the Department of Commerce .

Nevertheless, total taxes have been compared with income figures eve nmore narrowly defined than personal income . Narrow concepts of income havebeen used, for example, in recent studies of the distribution of the tax burden b yincome classes . And it can be shown that the choice of income concept has a nimportant effect on estimates of the degree of progression in the tax burden a swell as on measures of the over-all effective rate of taxation .

In his study of the distribution of the tax burden by income classes i n1948, Professor R . A . Musgrave compared total taxes (derived primarily from th enational income accounts) with a total "money income" figure which was $36 billio nshort of the Department of Commerce estimate of personal income for 1948 . 9Professor Musgrave offered several reasons for his use of the narrower mone yincome figure, but his discussion implied that, for showing the general level o f"effective tax rates" (as opposed to the distribution of the tax burden by incomeclasses), the Department of Commerce personal income figure would have bee nmore suitable .

Dr, Rufus Tucker, in his revisions of Musgrave's estimates, 10 criticizedMusgrave for'excluding income in kind, on the ground that this omission resulte din a serious overstatement of the tax burden on the lower income groups . But hisdiscussion also implied that, if it were possible to distribute all parts of persona lincome by income classes, personal income would be the appropriate incom efigure with which to determine overall effective tax rates .

8. Survey of Current Business, July 1957, p . 11 .

9. "Distribution of Tax Payments by Income Groups : A Case Study for 1948, 1 1National Tax Journal, March 1951, p, 11 . About half of the $36 billion differ-ence was due to "statistical discrepancies . "

10. "Distribution of Tax Burdens in 1948," National Tax Journal, September 1951 ,pp . 269 ff .

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In his rejoinder to Dr . Tucker, 11 Musgrave broadened his definition ofincome considerably . In a later estimate of the distribution of the tax burden i n1954, he used a "broader concept" of total income, which was very close to th eDepartment of Commerce personal income series, but differed from persona lincome by including capital gains, retained earnings, the "unshifted" part of th ecorporate profits tax (the part falling on shareowners), and excluding some item sthat make up personal income . 12 Musgrave's income figure, broader concept, fo r1954 was $285.4 billion as compared with personal income of $287 .3 billion .

In his original study Musgrave said that :

11 . . .the underlying income total is relatively unimportant for ou rpurpose, which is primarily to estimate the distribution of tax payments[by income groups] . Whereas the general level of 'effective tax rates '(i .e . taxes contributed as a percentage of income received) . . . depend supon the income total used, the distribution of the tax bill does not ." 1 3

While the distribution of the tax bill was not significantly affected by th echoice of income concept, the apparent degree of progression was very muc haffected . The addition of income in kind had a significant effect on the distributio nof the tax burden, particularly at the low income levels . The imputation of retainedcorporate earnings also had a significant effect on the apparent degree of progres-sion in the tax burden at high income levels as measured in these studies . If totaltaxes are related to personal income as defined by the Department of Commerce ,the distribution of the tax burden will appear more progressive at high incom elevels than if total taxes are related to national income (or an income figure whichincludes corporate profits taxes and undistributed corporate profits) .

Other students of tax burden distribution have used still other definitionsof income . For a study of the distribution of the tax burden by income groups i n1946-1947, E . R. Schlesinger derived his income figures as follows :

"Total personal income . . . had to be adjusted because several im-portant taxes that are borne by individuals come out of the net nationa lproduct rather than from personal income . For this reasoi,, an ad-justment consisting of corporate income taxes, undistributed corporat eprofits, and estate and gift taxes was added to total personal income i norder to derive total income for tax purposes ." 14

11. "Further Consideration of the Distribution of the Tax Burden," NationalTax Journal, March 1952, pp . 1-39 .

12. "The Incidence of the Tax Structure and Its Effects on Consumption, "Federal Tax Policy for Economic Growth and Stability, Papers Submittedby Panelists Appearing Before the Subcommittee on Tax Policy, Join tCommittee on the Economic Report, November 9, 1955, p . 109 .

13. National Tax Journal, March 1951, p . 12 .

14. Fiscal Policies and the American Economy, Edited by K. E . Poole, NewYork 1951, p . 411 .

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It is not clear why estate and gift taxes, which are part of personal taxe sas defined by the Department of Commerce, had to be added to personal income .Moreover, there appears to be no good reason why indirect business taxes wer enot added into the income figure . In this last respect Schlesinger's procedur econforms with that of Musgrave and Tucker .

This procedure appears to izzlply that indirect business taxes, defined a sthose taxes included in market price, are paid by the individual when he spends hi sincome, and that therefore it would be double counting to add these taxes to hi sincome. This is a fallacy arising out of excessive attention to the individual cas eand neglect of the collective results for all individuals . Indirect business taxe sreflect a part of what we produce and of our collective income-- that part whic hgoes to the government without a corresponding amount of "income" being paid ou tin the industries or businesses where these taxes are imposed . But the "pie" outof which the government's cut is taken is the total product . If the total produc tfrom which taxes may be paid is to be imputed as income to individuals, indirec tbusiness taxes must be added on the income side of the accounts .

The fallacy noted above is related to a conundrum which is of some in-terest in this connection . In the national income accounts "disposable persona lincome" is net of all taxes: indirect business taxes are deducted from net nationa lproduct to obtain national income ; corporation income taxes and contributions fo rsocial insurance are deducted from national income to arrive at personal income ;and personal taxes are deducted from personal income to obtain disposable persona lincome . How then can disposable personal income be sufficient for people to bu ygoods and services at prices that include taxes ?

The income of people in the consumption goods industries is insufficien tto buy the goods and services produced by those industries . But many peopleobtain their incomes from activities that do not involve production of consumers 'goods and services--their incomes come from production of capital goods an dgoods and services provided by government--so that the income of these peopl eplus that of people in the consumption goods industries is sufficient to buy al lconsumers' goods and services at prices that include taxes .

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II . Are All Taxes Paid by Individuals ?

The fact that all taxes are often related to personal income ma reflec tthe temptation to believe that since "all taxes are paid by individuals," lK all taxe sshould be related to "personal income . "

In the preceding sections of this paper we have mentioned various part sof total product that never become part of the income of individuals . Thus capita lconsumption allowances represent a part of gross production that is earmarkedfor maintenance or replacement of capital equipment . But the disposition of thi spart of gross product is largely a matter for corporate management . Individualsas such have no claim to this part of "gross" income . Similarly, undistribute dcorporate profits represent a part of the total claims on output which is controlle dlargely by corporate management even though the individual stockholders hav esome legal claim to this income . Corporate profits taxes and indirect busines staxes represent a part of the total product which we dispose of through collectiv eaction. As in the case of undistributed corporate profits, it may be doubted t owhat extent the individual has claim to or can exercise control over this part ofincome and product .

These parts of the total product may be imputed as income to individuals .But individuals' claim to or control over them is so limited that it is doubtful tha tthe imputation of these items as income to individuals is justified . To the extentthat taxes come out of such parts of total product, we have grounds for saying tha tpart of the tax burden is not borne by individuals .

15 . Cf. Philip E . Taylor, The Economics of Public Finance, New York 1949, p . 281 .

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III . How Much Income is "Taken" by the Government ?

When the question is asked, how much income is taken by the government ,the word "take" implies that something is removed from individual use and put t ogovernmental uses . The line between individual and governmental or between"public" and "private" uses is not easy to draw . This is true particularly in thecase of transfer payments . (For the relation of transfer payments to national an dpersonal income, see page 13 . )

Transfer payments aru those for which no goods and services are give nin return. Though not classified as transfer payments, interest on government deb tis essentially of the same character--in the national income accounts governmentinterest " . . .is not considered income arising in current production . i16 Throughsuch payments and the taxes necessary to support them, governments redistributeclaims to income and product but do not necessarily "take it away ." To a consid-erable degree these government payments go to the same people who pay the taxes .As holders of government bonds, bank deposits, insurance, and pension rights, in-dividuals receive government interest in not too different measure from the taxe sthey pay to meet that interest . 17 As participants in the social security program ,the same individuals may receive benefit payments and pay social insurance taxe sin one year .

Some economists have proposed that transfer payments be treated a snegative taxes rather than as expenditures of government, and for certain purpose sthis may be justified . But it is not justified in a calculation of the weight of the ta xburden . Transfer payments do involve some "taking away," at least from those whopay relatively more in taxes than they receive in transfer payments .

These payments also impose a burden even where the taxes paid are ap-proximately equal to the payments received (directly or through financial inter-mediaries) . Although we get back in transfer payments and interest part of th etaxes we pay, it is not a costless exchange even excluding administrative costs fro mconsideration . For governmental transfers restrict individual freedom of choice i nthe disposition of income. We are forced to buy the insurance provided unde r

16. National Income, 1954 Edition, p . 97 .

17. Compare the following distributions for 1954 :

Money Income Class (Thousands )Under $2 $2-$3 $3-$4 $4-$5 $5-$7 .5 $7 .5 & Over Tota l

Liquid Assetsa

10%

7%

10%

11%

22%

40%

100 %Total Tax Burden

5

6

11

12

25

42

100a. Government bonds, bank accounts and shares in savings and loan associations .

Source : Liquid assets - 1954 Survey of Consumer Finances, Federal Reserv eBoard ; tax burden--R .A . Musgrave, "Incidence of the Tax Structure," Federal TaxPolicy for Economic Growth and Stability . Papers submitted by Panelists appear-ing before the Subcommittee on Tax Policy, Joint Committee on the Economi c

- Report, November 1955 .

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social security. We probably are induced to invest more in liquid assets becaus eof the large government debt; for the existence of a large government debt make sliquidity and safety of financial investments relatively cheaper than they otherwis ewould be .

As contrasted with transfer payments, government expenditures for good sand services do, in the first instance, "take away" part of the national product fro mprivate claimants . But the •: :nportance of the taking away varies with the type ofprogram. Defense expenditures use up part of the national product with little o rno direct economic benefit to the private economy ; i.e . military goods themselve sdo not provide economic welfare nor significant additions to productive capacity .Expenditures for police and fire protection, provision of highways and educatio nprovide important services to private production, and reduce the need for direc tprivate expenditures .

The se»erity of the tax burden thus depends in part on the uses to whic hgovernment puts the tax revenue . 1 8

18 . For further discussion, see Gerhard Colm, "The Government Sector, A Re -examination of Controversial Issues ." Problems in the International Com-parison of Economic Accounts, Studies in Income and Wealth, Volume Twenty ,National Bureau of Economic Research, Princeton, 1957, pp . 121-123, andComment by Solomon Fabricant and others, pp . 190-216 ; also R .A . Musgrave ,National Tax Journal, March 1951, pp . 6-8 .

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IV. Reliability of the Statistic s

In using the ratio of taxes to national income or product consideratio nmust also be given to the fact that data on taxes collected or paid probably ar emore complete and accurate than the data on components of national income an dproduct . 19 Reporting and record keeping are probably more complete for taxe sthan for wages and salaries, the most reliable component of national income . Taxdata are certainly more complete than data for the major components of gros snational product . The adjustment of tax data from a cash to an accrual basis fo rnational income purposes can also be done quite accurately .

The reliability of the major items of gross national product is describe din National Income, 1954 Edition (pp . 64, 65), in part a's follows :

"Government purchases of goods and services are highest on thescale of reliability among the components of gross national product .Were it not for certain problems involving the timing of purchases whichare important when the level of government expenditures is changin gsharply, the data for the Federal Government would parallel the qualit yof the wage and salary estimates, using the criteria of definitional clarity ,quality of record-keeping and reporting, quantity of available information ,and the statistical foundation of the estimating adjustments . However, th eproblem of timing, together with the fact that the series on state and loca lgovernment purchases is less well-founded than the Federal series, re -duces the reliability of the combined government purchases series belo wthat of wages and salaries . . .

"The estimates of change in business inventories probably rank lowes ton the product scale . . .

"Estimates of producers' purchases of durable equipment and ofpersonal consumption expenditures for commodities--both based largel yon producers' records--follow government purchases in reliability on th eproduct side . . .

"The series on personal ccnsumption expenditures for services i sbased largely . . . on producers' sales records . . .But reliability is significantl ylowered by the fact that many of the comprehensive sources on which heav yreliance is placed become available only rather infrequently . . .

"The field of private construction is an extremely difficult one fo rstatistical estimation . . . complex statistical methods are necessary t oadjust for the coverage gaps and timing deficiencies of data secure dthrough varied reporting systems . "

The definition of taxes is somewhat more clear cut than the definitions o fgross national product and national income . There are differences of opinion ove rthe boundary line between tax and nontax payments to government . But the only

19 . This is a judgment with which some experts disagree .

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significant doubtful items are social insurance contributions, for which data ar ereadily available--the tax burden can always be shown both including and excludin gsocial insurance contributions . Substantial changes have been made in the defini-tions of gross national product and national income, and further changes are advo-cated by some economists . The 1947 revision of concepts raised the gross nationa lpruduct figure fur 1946 by a net amount of $5 billion and the national income figur efor 1946 by a net amount of $6 billion .

The inclusion of substantial amounts of income and product in kind raise squestions similar to those discussed above . It may be doubted whether it can b esaid that money taxes are paid out of nonmoney income . Yet if net rent of owner -occupied houses were excluded from national income (as was the case before 1947) ,a change in the proportions of rented and owner-occupied housing would affect th ecalculation of the weight of the tax burden . The value of the services of rentedhousing is presumably fully reflected in money transactions, but the value of th eservices of owner-occupied housing is not .

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V. Summary and Conclusion

Measuring the tax burden against personal income or national income a sdefined in the national income and product accounts overstates the weight of th etax burden becau:ie theso income totals exclude part of the product from whic hgovernment takes a share . National income, defined as net of indirect busines staxes, is also inappropriate for comparisons of the tax burden over time period sand as between countries where there are substantial differences in the proportio nof indirect to direct taxation .

In general, net national product is the most appropriate base on which tomeasure the total tax burden . But in wartime it is gross product that is relevan tin considering the diversion of resources from private to governmental uses, fo rin emergencies resources can be diverted from private capital replacement t oother uses .

For special purposes it may be justifiable to relate total taxes to othe rincome concepts . Thus it can be argued that for the purpose of estimating the dis-tribution of the tax burden by income classes, parts of the national product canno tbe accurately allocated to different income classes . In fact it is a serious limita-tion to all estimates of the degree of progressivity of the total tax burden tha tavailable data on the distribution of families by income level are necessarily basedon relatively narrow income concepts . Indeed, it is doubtful that all income andproduct out of which taxes may come should be imputed to individuals .

Some aspects of the tax burden can be examined without regard to the ex-penditure side of government operations . But the severity of the tax burden depend sin part upon the uses to which the tax revenue is put . To the question, how much ofour income is "taken" by the government, there is no easy answer :

'The percentage of total taxes to national product is a useful summar yfigure . But it can easily be pressed too far, particularly in comparisons over along time period and as between different countries . Neither the denominator no rthe numerator of this ratio is unambiguous . Both are heterogeneous totals whosecomposition changes over time . The role of the government in the economy canno tbe accurately or adequately described by a few over-all statistical measures .

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APPENDIX

Table Al

GROSS NATIONAL PRODUCT, NET NATIONAL PRODUCT, NATIONA LINCOME, FEDERAL, AND S'iWVE AND LOCAL TAX RECEIPT S

Calendar Years 1929-195 6

(Billions)

Year

Gros sNationalProduct

NetNationalProduct

NationalIncome Federal

Tax Receiptsa

State and Local Total

1929 $104 .4 $ 95 .8 $ 87 .8 $ 3 .7 $ 6.6 $10 . 31930 91 .1 82 .6 75 .7 3 .0 6.8 9 .81931 76 .3 68 .1 59 .7 2.0 6.6 8 . 51932 58 .5 50 .9 42 .5 1 .6 6.4 8 .01933 56 .0 48 .8 40 .2 2.6 5 .9 8 . 51934 65 .0 57.9 49 .0 3 .5 6.2 9 . 71935 72.5 65 .3 57 .1 3 .9 6.7 10 . 61936 82.7 75.2 64 .9 5 .0 7 .2 12 . 11937 90 .8 83 .0 73 .6 7 .0 7 .6 14 . 61938 85 .2 77 .4 67 .6 6.4 7 .8 14 . 21939 91 .1 83 .3 72 .8 6.7 7.9 14 . 61940 100 .6 92 .5 81 .6 8 .6 8 .3 16 . 91941 125 .8 116 .8 104 .7 15 .3 8 .8 24 . 11942 159 .1 149 .0 137 .7 22.8 8 .9 31 . 71943 192.5 181 .6 170 .3 39 .1 9 .1 48 . 21944 211 .4 199 .4 182.6 40 .7 9 .3 50 .01945 213 .6 201 .0 181 .2 42.2 9 .8 52 . 01946 209 .2 197 .6 179 .6 38 .9 11 .0 49 .91947 232.2 218 .1 197 .2 43 .1 12.7 55 . 71948 257 .3 240 .8 221 .6 43 .1 14.5 57 . 61949 257 .3 238 .9 216 .2 38 .8 15 .8 54 . 61950 285 .1 264 .6 240 .0 49 .8 17 .4 67 . 21951 328 .2 304 .8 277 .0 64.1 19 .2 83 . 31952 345 .4 321 .6 290 .2 67 .6 20 .9 88 . 51953 363 .2 336 .7 302 .1 69 .9 22.5 92 .41954 361 .2 332 .2 299 .0 63 .4 23 .8 87 . 21955 391 .7 360 .1 324 .1 71 .8 26.1 97 . 91956 414.7 380 .4 343 .6 77 .5 28 .1 105 .6

a . Government receipts on income and product account less nontax receipts . Taxreceipts are net of refunds and include contributions for social insurance .Detail will not necessarily add to totals because of rounding .

Source: Department of Commerce .

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Table A 2

TOTAL TAX RECEIPTS' AS A PERCENTAGE OF GROSS NATIONALPRODUCT, NET NATIONAL PRODUCT, AND NATIONAL INCOM E

Calendar Years 1929-195 6

Federal, State and LocalTax Receipts as a Percentage o f

Gross NetNational National National

Year Product Product Income

1929 9 .8 10 .7 11 . 71930 10 .7 11 .8 12 . 91931 11 .2 12 .5 14 . 31932 13 .7 15 .7 18 .81933 15 .3 17 .5 21 . 31934 14.9 16 .7 19 . 81935 14 .6 16 .2 18 . 51936 14.7 16 .1 18 . 71937 16 .0 17 .5 19 .81938 16.6 18 .3 21 . 01939 16.0 17 .5 20 .01940 16 .3 18 .3 20 . 71941 19 .2 20 .7 23 .01942 19 .9 21 .3 23 .01943 25 .0 26 .5 28 . 31944 23 .7 25.1 27 .41945 24 .3 25 .9 28 .71946 23 .8 25 .3 27 .81947 24.0 25 .6 28 .31948 22.4 23.9 26 .01949 21 .2 22.8 25 .21950 23 .6 25 .4 28 .01951 25 .4 27.3 30 . 11952 25.6 27 .5 30 .51953 25.4 27 .4 30 . 61954 24.1 26.2 29 .21955 25.0 27 .2 30 .21956 25.5 27 .8 30 .7

a. Government receipts on income and product account less non(,-:xreceipts . Tax receipts are net of refunds and include contribution sfor social insurance .

Source ; D apartment of Commerce .

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Table A 3

GROSS NATIONAL PRODUCT AND GOVERNMENT EXPENDITURE SFOR NATIONAL SECURITY, OTHER GOODS AND SERVICES ,

INTEREST AND TRANSFER PAYMENTS a

Calendar Years 1929-195 6

(Billions )

Government Expendituresb fo r

Gross Goods and Services . Interest and Transfer Payment s

National National Other, Less Transfe rYear Product Total Security Government Sales Total Interest Payments

1929 $104 .4 $ 8 .5 $ 8 .5 $

1 .9 $1 .0 $

. 91930 91 .1 9 .2 9 .2 2 .0 1 .0 1 . 01931 76.3 9 .2 9 .2 3 .1 1 .1 2. 11932 58 .5 8 .1 8 .1 2 .6 1 .1 1 . 41933 56 .0 8 .0 8 .0 2 .6 1 .2 1 .51934 65 .0 9 .8 9 .8 2 .8 1 .2 1 .61935 72.5 10 .0 10 .0 2 .9 1 .1 1 .81936 82.7 11 .8 11 .8 4 .0 1 .1 2 .91937 90 .8 11 .7 11 .7 3 .1 1 .2 1 . 91938 85 .2 12.8 --------- 12.8 3 .6 1 .2 2 .41939 91 .1 13 .3 $

1 .3 $12 .1 3 .7 1 .2 2 .51940 100 .6 14 .1 2 .2 11 .9 4 .0 1 .3 2 .71941 125.8 24 .8 13 .8 11 .0 3 .9 1 .3 2 . 61942 159.1 59 .7 49 .6 10 .2 4 .2 1 .5 2 . 61943 192.5 88 .6 80 .4 8 .2 4 .6 2 .1 2 .51944 211 .4 96 .5 88 .6 7 .9 5 .9 2 .8 3 . 11945 213 .6 82 .9 75 .9 6.9 9 .3 3 .7 5 . 61946 209 .2 30 .9 21 .2 9 .7 15 .3 4 .5 10 .91947 232 .2 28 .6 13 .3 15 .3 15 .5 4 .4 11 . 11948 257 .3 36 .6 16.0 20 .6 15 .0 4 .4 10 . 51949 257 .3 43 .6 19 .3 24.3 16 .2 4 .6 11 . 61950 285.1 42 .0 18 .5 23 .5 19 .0 4 .7 14 . 31951 328 .2 62.8 37 .3 25 .5 16 .4 4 .8 11 . 61952 345 .4 77 .5 48 .8 28 .6 16.9 4 .9 12 . 01953 36 .1 .2 84 .4 51 .5 32.9 17 .9 5 .0 12 . 91954 361 .2 76 .6 43.1 33.6 20 .2 5 .2 15 . 01955 391 .7 77 .1 41 .3 35 .8 21 .2 5 .2 16 . 01956 414 .7 80 .2 42 .4 37 .8 22.9 5 .7 17 .2

a. Detail will not necessarily add to totals because of rounding .b. Includes all government expenditures on income and product account excep t

subsidies less current surplus of government enterprises .

Source: Department of Commerce .

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