Taxes, debt, deficits, Tea Parties, "populist anger", financial crises, there sure is a lot of hootin' and hollerin' about money these days.
Sadly, the debate over these issues has pretty much been "NO MORE TAXES!" and then we reply "SHUT UP, YOU'RE AN IDIOT!", and it goes back and forth, back and forth.
There's actually some interesting things happening, long-term in our tax policies that really worth having a substantive conversation over. The current trends do quite a bit to explain the popular anger at taxes, though the specifics of the anger tends to be quite displaced, just as the media and our capitalist overlords planned it. The reality is there is a ton of room to craft tax policy, making it more just and fair for the people waving misspelled signs in the street, if we can actually manage to have a discussion about it.
Lots of pretty graphs and statistics below the fold. Prepare to get your wonk on.
Where's it going?
This is discretionary spending for 2009. This does NOT include mandatory spending (i.e. medicare, SS, interest on debt), and is instead an amalgamation of the current spending bills.
This is the spending that we can change without having to repeal a bunch of well-loved laws.
The majority of government spending is found here, in our total outlays. This includes our mandatory spending, mostly related to Social Security, Healthcare, Unemployment benefits, and interest on the debt. Sorry, this chart is from 2008, and I suspect that the 2010 chart will have the "income security" pie piece slightly larger, as we extend unemployment benefits.
What I think is important to take away from this is that there isn't a huge amount of fat on this chart. Every one of these programs is important, and has large groups of vocal supporters, from all walks of American life. I personally believe that our defense spending could be reduced dramatically, but that is an argument for another day. Regardless of your beliefs, if you want to decrease federal spending, one or all of these major programs needs to be reformed: Defense, Social Security, Healthcare, Unemployment and Debt.
TAXES
So what's up with our taxes? Are they going up?
As you can see, Federal revenue (taxes) and spending have been reasonably steady since 1970, with just a slight upward creep as a percentage of GDP. But there is shifting going on, with certain groups receiving cuts or increases with every single administration, but the average size of government's share of our economy remains fairly steady. However, starting with Nixon, you can see a clear trend towards deficits as an ongoing policy, rather than the back and forth dance between deficit and surplus in the decades before.
We can see the widening of the deficit during the Reagan years, the temporary reversal during the last bit of the Clinton administration, and the reopening of the gap during the early parts of the Bush administration. An up-to-date chart would show a gap slightly larger than the mid-80's gap, as our federal government deals with decreased revenue from the economic downturn and an uptick in federal spending and simultaneous tax cuts via the stimulus package.
Let's reiterate this: annual federal deficits and taxation are in line with historical norms as a percentage of GDP. While deficits are high, they are not terribly higher than they were during the Reagan and Bush years, and very few people were calling our financial state a crisis back then. This is not to say that deficits don't matter (as Karl Rove famously quipped), but to say that any claims of a deficit "crisis" should be taken with a grain of salt. The reality is that the deficit is at a normal level, but total debt is not.
This chart clearly illustrates the problem. While our annual deficits are at an elevated, but normal level, our total debt holdings are at an all-time high. This is the result of "maintaining" our debts rather than paying them, and maintaining revenues at levels below expenditures for such a long period of time. Deficit spending has become par for the course, rather than something pursued only when necessary. Keynesian theory states that deficits during recession should be coupled by surpluses during boom times, or the system will not sustain itself. What we see here is the unraveling of our half-way-scheme to boost the economy over several decades without saving in between.
So who is paying taxes right now? Just how much money do Americans make anyway?
Here's a breakdown of incomes by percentile from 2001. As you can see, the top 1% of earners are major outliers, with drastically higher incomes than even the top 5% of earners. This trend has continued in recent years, and is even more stark when viewing the top 0.1% of earners, whose incomes have increased dramatically over the last decade. Incomes for the lower levels have actually dropped by a few percentage points when adjusted for inflation.
So, how do we treat these outliers? This chart graphs out marginal tax rates over time, with the top 1% in red.
As you can see, we have a clear trend AWAY from "redistribution of wealth", with top earners being grouped more and more with the lower quintiles in terms of taxation. The fact that this trend is anathema to the current right-wing media narrative is probably so obvious as to not be worth mentioning here.
But this, I think, is where it gets really interesting, as this next chart deals with something that is rarely brought up, but has a major impact on the way that an individual perceives federal tax policy. This is the income level that puts an individual in the top tax bracket.
It's worth noting that this graph is on a logarithmic scale. If this was a normal, linear graph, the top tax bracket would be marked somewhere over your rooftop, with the current levels still residing nicely on the computer screen. Over time, the top tax bracket has increasingly lumped a larger number of taxpayers in with our 1 percenters. Our current top tax bracket sits around $300,000, essentially meaning that the well-to-do are taxed at the same rate as the super-rich. During the Reagan years, the top tax bracket made it all the way down to $80K! Is it any wonder he had no trouble passing tax cuts for the rich?
Our top tax rate and threshold are both trending lower over time, and simultaneously annual deficits have become the norm, and as a result, our debt has climbed steadily.
But we can reverse this trend easily. As you can see in the chart above there is almost no correlation between top marginal tax rates and economic growth, which disarms the number one argument against higher taxes on the rich: that it will harm the economy. However, there is a strong negative correlation between top marginal tax rates and total debt holdings. The lower taxes go, the greater our debt grows. This isn't rocket science, people.
Let's take another look at the first two graphs at the top of the page. One of the interesting things about the two of these is that there is a simultaneous spike in debt, spending, and taxes at the start of World War II. The American government put it all on the line, borrowed heavily from the American people and banks, and managed to pay it all off relatively quickly. During this time, the top marginal tax rate was over 90%, and the top tax bracket started at an astronomical $50 Million a year. The American government took the absolute top earners, the industrialists, importers and manufacturing mavens, all of whom benefited greatly from the industrialization of the war, and introduced a mild austerity package to pay for it all, effectively capping their after tax income at around $300,000 (1940 dollars). After a short while, the debt was paid and overall taxes returned to their previous levels, though the top bracket fell much more slowly.
In our current state, we have instead slowly run up the credit card, irresponsibly borrowing at will for every little program or war, while continually lowering taxes on the absolute top earners, the very group of people who benefit most from our overseas adventures and government largess at home. Our current debt dwarfs WWII's cost, yet the way we tax our top earners shows that we are not serious about paying that debt, ever.
This is the long-term influence of wealth on our political process. While progressives argue the benefits of raising taxes on the rich, the $300,000 a year crowd is screeching that they've been taxed enough already. And you know what? They're right. The well-to-do are tired of being treated the same way as the super-rich, they just haven't though of it in those words. Yet.
We need to begin making preparations for a more stratified tax code that does not lump Dr. Smith and Attorney Joe in with Warren Buffet and Miley Cyrus. When we craft policy that restores fairness to taxation of the top 5 percent, we will find it to be easier to engage them on policy directives, and campaign donations for progressive candidates (ka-ching!). Plus, we can balance our budget and keep our bonds from falling down the Greek rabbit-hole to junkdom.
The crazy Tea-Partiers are on to something: the debt needs to be paid. But they don't want to be the ones paying it, obviously. And the truth is, they shouldn't be. The tax and economic policies of the past 40 years have continually benefited the super-wealthy, leaving the rest of us riddled with debt and economic crises. If these trends don't reverse, or at least take a small step back, there is little hope for the US government's financial state.
During World War II, the industrialists knew it was their patriotic duty to pay high taxes. Certainly they weren't very happy about it, but they understood the necessity. It was obvious. Today's situation demands no less, arguably more, but we find the rich darting behind small business owners and family practitioners, whispering about how high taxes are. Hopefully, our leadership can see through the subterfuge, but don't count on it. I recommend that you write and call your representative, and encourage them to support a more stratified and historically normal tax policy. Thanks for reading.