Sunday Spectacle CCXXII

Source of American Government Funding
(1873-1940)

Ever wondered how taxation has changed in America over the last 100+ years?

Following charts show the sources of government revenue in America from 1873 to 1940. Other developed countries are somewhat similar from a long-term perspective.

Until the early 1900's, there was really no personal income taxes or corporate income taxes. Most of the revenue in the distant past was through customs levies and tobacco/liquor taxes. So basically nearly all government tax was consumption tax. The amount government collected was very small by modern standards (US government collected no more than 800 million in taxes in the 1800's whereas it generated 3+ billion by 1918).

Government wasn't large and it didn't provide much in the 1800's (there was no standing armies for a long time, not to mention any notion of social welfare, public education, large-scale healthcare, no major public infrastructure projects, and so forth.) Government became very large in the 1900's and started providing way more services (particularly public education and healthcare). I would guess that large government probably didn't have as much positive impact on economic growth but it probably increased standard of living by orders of magnitude (which isn't really captured in GDP or other economic measures).

Chart stops in 1940 but my opinion is that, by the 2000's, government in most countries, certainly developed countries like USA or Canada, have gotten too large. I think the pendulum has swung too much towards larger government and government needs to shrink. I don't think we should go back to the 1800's but society will likely benefit if government were, say, 1/3 smaller.

(click on image for a larger version; note that top graph scale is different from bottom one)

source: Extracted from the book, Wall Street Waltz (Ken Fisher, 2007)