Senators Review US Federal Tax Trends

by Leroy Baker, Tax-News.com, New York

06 December 2010

The Senate Finance Committee, chaired by Max Baucus, recently convened a hearing to examine the relationship between the United States tax code and historical trends in income and federal revenues, as part of a series of hearings on tax reform.

The hearing focused on how the taxes individuals and businesses pay have been affected by economic, demographic and social changes, why these changes have occurred and how those changes can be leveraged to improve the economy. “The American economy is evolving, and the tax code should follow suit,” Baucus said.

“We need to be at the forefront of adapting our tax system to the constantly changing economy, and the challenges these changes create for families and businesses,” he added. “We need to find ways to improve the tax code that attract new businesses, manufacturers and jobs, while boosting those that already exist as well.”

The Congressional Budget Office pointed out that, over the past 40 years, federal revenues have ranged from nearly 21% of gross domestic product (GDP) in 2000 to less than 15% in 2009 and 2010, averaging 18% of GDP over that span. It projects that, under current law, federal revenues will again reach 21% of GDP in fiscal year 2020.

However, it was also noted that the composition of federal tax revenues has changed significantly since 1950. As a percentage of total revenue, social security taxes have increased and corporate and excise taxes have decreased.

For example, in 1950, corporate income taxes provided 30% of federal revenue; but, by 2009, they made up only 7%. In the 1950s, excise taxes produced 19% of federal revenue; now they comprise only 3%. Over the same period, social insurance taxes, more than quadrupled. In 1950, they provided about 10% of federal revenues. By 2009, they generated 42%.

Baucus questioned expert witnesses about the causes of those changes in tax revenues, particularly the declining share of revenue raised by the corporate income tax. He sought their perspectives on whether this decline is cause for concern, and whether the tax code currently strikes the right balance in its taxation of corporations versus businesses taxed on a pass-through basis.

For example, it was questioned whether it is a cause for concern that fewer businesses are structuring themselves as corporations, and whether more businesses structured themselves as corporations in the past because corporations were used as tax shelters; or whether it was because corporations are now taxed too heavily.

How the tax code affects the US’s ability to remain competitive in the global economy was also questioned; in addition to how it could also help save and create jobs and to what extent it plays a role in outsourcing American jobs overseas.

If there was a proven means of determining how effective tax 'expenditures' are in achieving their desired outcomes was also discussed, together with what changes could be made to tax expenditures to improve that effectiveness, while also helping to close the estimated USD345bn tax gap, in taxes owed but not paid each year.

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