Income Taxes, Government Spending, and National Debt

Let’s take a quick look at history of the U.S. Government tax and spending policies, since the relationship of one to the other determines our national debt – the less you tax and the more you spend the higher the national debt.

Since the income tax beginnings in 1913, we’ve had a progressive income tax – the more you make the higher the tax rate – based on the idea that those who make more money are better able to pay and are recipients of more government services. Since coming into existence, the rates have been all over the place down through history. It depends on who was in power and what was going on in our history. From 1913 to 1979 the bottom rate average was about 10% on taxable income up to about $4000. Other than the first 2 years, the top rates averaged about 70% with all kinds of variances in taxable income – over $100,000 to over $5,000,000. From 1940 to 1963 the rates were in the 80% to 90% range for taxable income over $400,000. In the war years of 1944 to 1945 the rate was 94% for taxable income over $200,000. From 1964 to 1980, the rate was in the 70% for taxable income over $200,000. Far cry from today! And this was the period where we had great economic growth in the U.S. It must not have deterred many wealthy from forging ahead.

Let’s concentrate on the last 30 years starting with the last two years of the Carter Administration (1979-80): bottom rate was 14% for taxable income up to $2100 and top rate was 70% for taxable income over $210,000. During his term our national debt went down – 0.4%.

We heard a lot about the Reagan years in the last election and one would think they were a shining example of responsible money management. Taxes did go down. In 1981, bottom bracket went to 11% of taxable income up to around $2200. Top bracket went to 50% with taxable income over about $190,000. His last 3 years bottom rate went up to 15% for taxable income up to about $31,000. Top bracket rate went down to 28% for income over about $31,000. Close to a “flat tax”. But spending was out of hand with record deficits resulting in record increases in national debt – 49% increase his first term and 40.2% increase his second term. A long way from responsible money management.

Then we have George H. Bush’s famous campaign promise, “Read my lips: no new taxes.” When it became obvious that deficit spending was getting out of hand he increased taxes: bottom rate of 15% on taxable income up to about $34,000 and top rate of 31% on taxable income over about $84,000. But, our national debt still increased by 32.7%.

We follow this with 8 years under Clinton – a Democrat billed as a tax-and-spend liberal – where we had smaller deficits and our national debt increased only 13% in his first term and in his second term decreased – 0.2%. This was with a bottom rate of 15% on income up to about $40,500 and a top tax rate of 39.6% for taxable income over about $268.000. Clinton showed, for the first time since Democratic Jimmy Carter, that we could live within our means, ending his second administration with a balanced budget and a surplus.

But, along comes George W. Bush and he did the popular thing with his supporters, not a wise thing, and gave the wealthy a tax break: bottom rate of 15% on a rising taxable income and a top rate of 35% for taxable income over about $330,000. He did this even though the economy was “going south” and we were involved in two mismanaged wars. Our national debt went out of sight – from $5,674T to $10,025T. That is a 77% increase over his 8 years and this figure does not include the recent bail-outs which would push the increase to 100% or doubling of our national debt.

All this leads us to some conclusions:
1. As uncomfortable as taxes are to all of us – they do cut into our income – we can’t keep spending money we don’t take in. At some point we are going to have to “bite the bullet” and pay higher taxes. Our other choice is to ignore it and pass it on to our kids and grandkids. What kind of a legacy is that?
2. In times of war we better be raising taxes.
3. Republican Conservatives, whose mantra is “reduce government spending and lower taxes”, have done us a disservice by following only ½ of their advice.
4. The claim that high taxes destroys incentive for business to invest, grow, and increase employment doesn’t hold water. Look back at the top rates for most of our income tax history and explain to me how we grew to the wealthiest most powerful country in the world with these high top rates.
5. Let's question everyone in our society who lump "small businesses" with the wealthy. It does come down to how you define a "small business." But, I can guarantee you that the vast majority of "small businesses" do not fall in the $250,000 + tax rates on net/taxable income.
6. Raising the taxes of the wealthy to 39.6% when Bush’s 2001 reduction to 35% expires soon shouldn’t be a tough decision. Especially if one adds in the growing lack of sympathy for the way some of our largest corporations have conducted themselves with taxpayer’s bail-out money.
7. There are times to deficit spend and grow our national debt. Unfortunately, now is one of those times. We need to get the economy rolling. Hopefully, it will be short term and the bail-outs are structured so that tax payers have a good chance of getting their money back.
8. Tax and spend policies are some of the toughest jobs of administrations and Congress. It can get real complicated. But, we citizens had better get involved in sorting through the rhetoric to get to the truth. These policies undoubtedly impact us more than anything the government does.