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Monday
Aug102009

The High Cost of Low Taxes

http://www.balloon-juice.com/wp-content/uploads/2009/03/graph.jpg

No offense intended to those of you out there who actually fall in to the highest tax bracket, but it could be much much worse.

I've said for years that the problem with our tax system is that it's not progressive enough and that there is a massive difference between someone making $350K/yr and someone making $1M+ per year.

So let's remember a time in this country where people could actually afford to own a home in California without a 6 figure salary, those simple times that the conservatives want to revive, you know, the 50's, when the highest tax bracket carried a 91% income tax.

In the above chart you will notice that during the largest period of American expansion in the last 100 years, income tax rates were, well, exceptionally high. You will also notice that as soon as President Reagan entered office things start to change, most notably the top tax rate starts falling, and the national debt starts growing. Now, since all the talk lately has been how the Obama administration is spending our kids into a debt they'll never get out of, I thought it might be interesting to see just how future generations have fared under other recent administrations. I couldn't find a chart anywhere that actually compared the growth of the national debt to income tax rates (although I'm sure there's one out there somewhere), so I made my own, I think you'll see right away that there's a pretty distinct correlation here:

Notice if you will that the national debt holds fairly steady from 1945 (end of WWII) to 1971, through both Democratic and Republican Administrations (although Primarily Democratically Controlled Congresses). The debt starts to creep up during the Nixon-Ford-Carter era, but still, from 1945 to 1980 the national debt increased by a grand total of $648B, certainly a lot of money, but compared to what followed, it's chump change.

To put it another way, from 1945 to 1980 (with average top tax rates of 80.87 81.42%) the debt grew at an average of 3.43% per year. Since 1981 (with average top tax rates of 39.61 40.14%) the debt has grown at 8.13 8.12% per year. It's simple math, cutting the top tax rate in half, has doubled the growth of the debt.

Since the Reagan administration, the only administration that has managed to slow the growth of the national debt was the Clinton administration, and guess how they did it? They increased taxes. Under the 2nd Bush administration the debt increased 172 173.07%, coinciding with yet another tax cut. Now, I will give them something of a pass in that they were dealing with totally unforeseen and unavoidable circumstances, yet, they're failure to deal with them in a fiscally responsible way certainly needs to be considered. (Note: During the 2nd Bush Administration government spending grew at an annual rate of 5.48%, with the largest increase seen in 2008 (20.97%, coinciding with a 10.36% growth in the debt for that year) 

Here's what it all boils down to, since the inauguration of Ronald Reagan in 1981, the national debt has grown from $994B (1981) to $9.98T (2008), a 1003.7% increase. Given that the debt increased only 349.4% from 1945 to 1980, that's pretty significant. But what does it all mean?

Well, what it says to me is that the idea that we need to cut back now to save our children's futures is about 30 years late and $10 trillion dollars short. It also implies that our tax code needs some serious attention, and not lip service extensions of credits, but a full recreation. We as a society need to realize that taxes are necessary, and that if we want to have the society we should, it's going to take a little bit more from everyone to get there.

Now, I'm not saying that we need wholesale tax increases or any kind of universal anything, what I'm saying is that if we want to maintain this country, and it's ability to function, we can't do it by cutting taxes, regardless of party affiliation. Let us remember that while we constantly complain about the way Congress spends our money, we always seem to have the same leadership in Washington, so why don't we start voting them out?

All in all, I don't agree with many of the things President Obama is doing, nor did I agree with most of the things President's Bush or Clinton did (I will say that I am too young to really have disagreed with the first Pres. Bush and or Reagan at the time, but historically speaking, I don't agree with them either). But they are not to blame in all of this, I mean sure, their policy desires and campaign promises are what got them elected, but at the end of the day, there is only one group of people to blame, the republicans the democrats the mainstream media fox news corporate fatcats white collar criminals corrupt officials the Clintons the Bush'sthe American voters.

Yep, I said it, we're to blame, and I'm every bit as guilty as the rest of you (although I did vote for Bob Barr in 2008). I voted for Gore, I voted for Kerry, and if they had won, they would have been just as bad as George W. Bush. Why? Because the Executive branch is tasked with enforcing the laws of the land, not creating it, and year after year we send the same politicians back to Washington to legislate, and spend our money recklessly, and that my friends, is completely on us. But I'm guessing, that even in these tough times, that we'll see less than 37% turnout for the 2010 congressional elections, and that is the most telling number of all. Nearly two-thirds of the American electorate, doesn't care enough about Congress to vote 1 time every two years, and that should make all of us ashamed.

Update:At the behest of a friend I have added a fourth line to the graph below representing government spending (in 2000 $) over the same time period. To be honest, I should have included this the first time, as I think it makes my point even stronger, as the growth of the debt significantly outpaces the increases in government spending from 1981 to 2008. During that time period, spending increased at an annual average rate of 3.80%, while the debt grew at an annual average rate of 8.13% per year. Oddly enough (when adjusted for inflation) government spending growth during this period shrank from an annual average rate of 4.03% from 1945 to 1981.

Most central to my original point, the growth of the debt began it's dramatic assent in 1982, when the top tax rates began to drop dramatically. From 1981 (President Reagan's Inauguration) to 1992 (end of President George H.W. Bush's term) the debt increased at an annual average rate of 11.85%, while government spending grew at an annual average rate of only 3.64%. During that time period the top tax rate dropped from 70% (1981) to 31% (1992).

Note: While adding the spending data, I discovered sources for the debt and tax rates that I felt to be more reliable, so you will notice a slight difference in the data between this chart and the original one above. The numbers themselves did not change dramatically, but I have added the updated numbers for the sake of accuracy)

Please feel free to contact me if you'd like to see the full data set.

Sources:
USGovernmentSpending.com (Total Spending in United States 1940-2014)
Free-For-All Politics(Top Tax Rates 1920-Present - Chart only)
The Tax Foundation (U.S. Federal Individual Income Tax Rates History, 1913-2009)
Whitehouse.gov (FY2010 Budget Historical Tables - Section 7: Federal Debt At The End Of Year 1940-2014)

 

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