Thursday, August 9, 2012

Election Primer 2012: 2. Basic Facts about Taxes

    Taxes are perhaps the most significant issue in this campaign. Politicians have talked non-stop about taxes for years. Much of the voting public is so riled up about taxes that they can’t see straight.
    Taxes are too big an issue to deal with in one short essay. Here I want to begin a discussion of taxes in the US by laying out a few facts, some of which appear to be ignored in our public discussions. Before we can evaluate what each party says about taxes and the tax policies they favor, we need to know some basics.
    Basic fact number one is that federal taxes have been falling for decades. From the end of World War II until 1964, the top tax rate was more than 80%; from 1950 through 1963, it was 91% - 92%, on all income over $400,000. This top rate was lowered to 77% in 1964, then again to 70% from 1971 to 1981, but was applied to all income over $200,000. A striking change was made in the 1980s, first lowering the top rate to 50% in 1982, then to 28% in 1988.
    The top rate was raised again in 1991 to 31%, then in 1993 to 39.6%. In 2003, that rate was again lowered to 35% on income above $300,000 to $400,000, depending on the year.
    Rates for the lowest tax bracket have followed a somewhat different path: around 20% until 1964, then 14% until 1982, then 11% until 1988. At that point, as the top tax rate was lowered to 28%, the lowest bracket’s rate was raised to 15%, where it stayed until 2002, when it dropped again to 10%.
    What do all these fluctuations mean? One obvious conclusion is that high, even very high tax rates on the wealthiest taxpayers do not impede economic growth. The US economy, measured by the Gross Domestic Product, grew faster from 1950 to 1970, when the top tax rate was 77% or higher, than since 1970, when it fell to half that level.
    A second conclusion is that lowering tax rates for high earners does not bring a stronger economy. In international comparison, Americans are not over-taxed. Economies which are doing as well or better than ours, like Germany, have higher tax rates: all incomes over $150,000 (married couples) are taxed at 42% or more. Tax rates are just one of many forces affecting the health of the national economy.
    Another basic fact is that 46% of American households paid no federal taxes in 2011. Fact spinners often misstate this by saying that 46% paid no taxes at all, which is untrue. About half of those 46% paid Social Security and Medicare taxes on their income. Many also paid state taxes on income which was not federally taxed. On federal tax returns this year, I and all other married couples could deduct $19,000 from our income without paying any tax. In Illinois, this deduction is only $4000. A full-time worker making the federal minimum wage would pay no federal taxes, but would be taxed on most of their income in Illinois. Of course, everyone pays sales tax. So virtually all Americans are paying taxes.
    If one is committed to lowering our federal tax burden, one obvious place to look is the defense budget. That label is actually a misnomer, since the Defense Department has waged offensive war in Iraq and Afghanistan for a decade. In any case, military appropriations (2012 budget: $683 billion) take about 20% of the total federal budget, about 9 times the budget appropriation for education, 13 times that of housing and urban development, 16 times that of energy, 25 times that for agriculture or transportation. Another useful comparison is that our military spending is greater than the combined defense budgets of the next 17 largest spenders.
    The deficit projected for the 2012 federal budget is about $1 trillion. Eliminating all  federal agencies and cabinet departments, except Defense, would not even come close to eliminating that deficit. Eliminating Medicare and Medicaid completely would come close to balancing the budget.
    Those are not serious ideas. But some people have suggested getting rid of individual cabinet departments, such as the Dept. of Energy. Proposals like that may sound good to some voters, but they mean little. All of our nuclear weapons and the nuclear reactors which power our Navy are controlled by the DOE. As in this case, every agency and department carries out indispensable functions. Eliminating a department might just mean putting its sub-agencies into other departments, with little savings.
    Lowering taxes means reducing spending. Many states, such as Illinois, have even more significant deficit problems than the federal government. If federal spending is reduced, state budgets might go even further into the red.
    Here is the most basic fact about taxes: at this moment, our tax system is not supporting our spending, at the state or federal level. Whatever proposals politicians make about taxes should be clear and detailed about how they will relate to spending. That’s probably too much to hope for.

Steve Hochstadt
Jacksonville IL
published in the Jacksonville Journal-Courier, August 9, 2012

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