Interestingly, the United States government’s federal taxing and spending, as percentage of the country’s GDP, has been nearly similar in the last four decades, as seen in the two graphs below.
In 1974, the government’s federal taxes were 16 percent of the U.S. economy; today, the government’s tax collection, as a percentage of the GDP, also sits near 16 percent.
During the early 1970s, the U.S. government spent about 20 percent of what the country made; the percentage was nearly the same in 2013.
The graphs tell a neat story: through economic booms and recessions, the government finds itself profiting and spending the same as a percentage of the GDP. The 1980s recession and high unemployment rates caused the government to tax less and to spend less. However, a decade later, the government found itself taxing more because of the extended period of economic prosperity. The ratios find themselves at similar points as they were forty years ago.
Though the numbers have not changed, the composition of the different spending and taxing categories have changed a bit. Government expenditures on Medicaid and Medicare, relative to the whole economy, have increased. On the other hand, military spending has decreased.
How does the United States compare with the rest of the world?
According to new Organization for Economic Development (OECD) data in the annual Revenue Statistics publication. The average tax revenue to GDP ratio in OECD countries was 34.6% in 2012, compared with 34.1% in 2011 and 33.8% in 2010.
The OECD report also showed additional factors that caused the tax ratio increase in the last couple of years. In progressive tax regimes, revenue rises faster than income during periods of real income growth. “Discretionary tax changes have also played a role, as many countries raised tax rates and/or broadened tax bases. Discretionary tax changes played a greater role in a handful of European countries where GDP levels actually declined in 2012.”
Compared to the rest of the world, the United States’s tax to GDP ratio sits near the average of all the OECD countries. If we look at the numbers from the two graphs above from the last forty years, it seems as though the ratio may alter with external economic factors; however, the ratio should return to the average that we now see.
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