by Ed Sawicki - February 2018
updated January 2019
updated February 2019
Today's National Debt: $
Source: U.S. Treasury Dept.
American taxpayers have been conned three times since World War II resulting in a national debt that's now almost $22 trillion and climbing. The first con was when the Reagan administration cut taxes on the wealthy from 70 percent to 28 percent, promising that trickle-down economics would make the economy work for everyone. It didn't.
The second con was when the George W. Bush administration cut taxes on the wealthy using the trickle-down economics lie again. The third con was when the Trump administration cut taxes on the wealthy again in 2017 using elements of the twice-disproven trickle-down economics to justify the cuts.
Trickle-down economics states that the benefits of tax breaks for corporations and the wealthy will trickle down to everyone else. In the United States, this has never been known to have significant benefit for the poor and middle class.
Why would they do this?
For decades, the Republican strategy has been to greatly reduce or eliminate our social programs. The public won't agree to their Social Security and Medicare being cut, especially since they've paid into Social Security with their own money. By forcing this vast amount of debt on the public, Republicans can claim that we can no longer afford social programs. Never mind that we were able to pay for the needs of the country from World War II through the 1970s.
This video features Republican House Speaker Paul Ryan blaming our national debt on "entitlements". He wants you to think of the word entitlement as meaning something you don't deserve; a handout. But you and your employer paid for your Social Security with your own money so you're entitled to it.
Entitlements are not handouts.
Ryan says it's impossible to solve the debt problem without affecting Medicare, Medicade, and Social Security but he fails to mention increasing government revenues by increasing taxation on the wealthy.
The money paid out as benefits for Social Security does not come from the government's general fund. It comes from a separate fund called the Social Security Trust Fund. Social Security does not impact government budgets or deficits. Here's Republican President Ronald Reagan confirming that Social Security has nothing to do with the government's deficit.
Does this mean that Ronald Reagan is calling Paul Ryan a liar? Sounds like it, right?
The national debt caused by World War II reached 119 percent of the nation's Gross Domestic Product (GDP) in 1946. Congress had raised the Federal Individual Income Tax rates at the start of the war to help pay for the cost of the war and the repayment of the war bonds that it had sold. The rate for the wealthiest taxpayers was over 90 percent. This allowed the government to collect enough tax revenue to pay down much of the debt relatively quickly after the war ended.
From WWII until the Reagan administration, the debt was reduced regardless of the party in power and in spite of expensive government projects, such as these:
- Interstate Highway System
- Intercontinental Ballistic Missile program (1500 missile silos)
- Early Warning Radars, such as the DEW line
- Missile Defense for major U.S. Cities - Nike sites
- Mercury, Gemini, Apollo, and other Space programs
- Tennessee Valley Authority hydro-power projects
We also fought three expensive wars during this time: the Korean War, the Vietnam War, and the Cold War.
We paid for these expensive projects and wars as well as reduce the national debt because the tax rates on the wealthy and corporations were high enough to ensure we had the revenue we needed. The highest marginal tax rate was nominally 91 percent from World War II to 1963. The national debt diminished rapidly during this time. The tax rate was lowered to 70 percent in 1965 during the Johnson administration. The national debt still diminished but less rapidly. But the 1980s would bring problems.
Debt vs. Tax Rates
This chart shows the national debt as a percentage of Gross Domestic Product (GDP). This is the red curve. It also shows the tax rate for the highest margin - the tax rate paid by the rich. You can place your mouse pointer over a point in either curve to see its value.
"Gross Domestic Product (GDP) measures the value of economic activity within a country. Strictly defined, GDP is the sum of the market values, or prices, of all final goods and services produced in an economy during a period of time." - from sparknotes
In this article, GDP is a yearly measure.
George H.W. Bush knew that trickle-down economics didn't work. He called it "voodoo economics" when he was campaigning against Ronald Reagan in 1980. Once he was selected to be Reagan's VP running mate, he dropped criticism of trickle-down.
In this article, marginal tax rates and margins are synonyms. Each row in a tax rate table is a margin. This is described by InvestingAnswers.
Be sure that you understand how margins work. If you don't, you may mistakenly think that the wealthy pay a high tax rate on ALL their income instead of just the income above, say, $500,000.
Clicking the above link opens a new browser tab. Remember to close it when you're finished reading, then return to this tab.
The IRS spends about 45 cents for every $100 it collects in taxes. Yet the IRS workforce has been reduced by almost half since the 1990s. Some of this is due to automation but mostly it's the result of Republican budgets.
Want to do something about people and corporations not paying their fair share?
Increasing the IRS workforce is a great deal.
Expressing the national debt as a percentage of GDP greatly simplifies the comparison of our current debt with the past and with other countries. We don't have to worry about getting confused by inflation, for example. It makes it more difficult for Republicans to add confusion by bringing up population increases, immigration, payroll taxes, or any other diversion.
The Reagan Con - 1981-1989
Ronald Reagan reduced the tax rate to 50 percent in 1982 and 28 percent in 1988, promising that trickle-down economics would ensure that the government revenue would increase. Simultaneously, he greatly increased military spending. Instead of increasing, government revenue decreased. This caused the national debt to increased rapidly. Reagan was wrong about trickle-down. The following George H.W. Bush administration, which some called Reagan's third term, did little to change things.
President Bill Clinton raised the tax rate to 39.6 percent and reduced military spending. This resulted in a budget surplus that reduced the national debt during his terms.
The Bush Con - 2001-2009
George W. Bush lowered the tax rate to 35 percent and started two expensive wars with no exit strategy. Bush also used the trickle-down con even though it was shown not to work under Reagan. The national debt increased rapidly. Then the economy crashed badly in 2008, driving up the debt sharply, which spilled over into the Obama administration.
The Trump Con - 2017-?
Most Americans are now aware of the trickle-down con but it worked twice before, reducing taxes on the wealthy and raising the debt to over $21 trillion. The Trump administration decided to use what worked before. We know that the tax cut will raise the national debt by at least $1 trillion and it will likely be more. Poor and middle class Americans and their descendants will be called upon to pay for more of the costs of running the country.
What could have happened instead?
The next chart shows what would have happened if Ronald Reagan and George W. Bush had balanced their budgets. It's impossible to know exactly what would have happened so this chart is based on the 1981-2010 budget estimates from Zfacts. The rest of the data is taken directly from the White House Office of Management and Budget.
The chart assumes that Reagan and Bush did not lower taxes. You can see the debt continue to decrease during their administrations (1981-1988 and 2001-2008). The debt would have been comfortably below 20 percent of GDP during the Clinton administration, so it would have been appropriate to lower the tax rate then. This shows the tax rate being reduced to 50 percent in 1995 but that's just an arbitrary example.
Since the national debt would have been near-zero when Barack Obama became president, we can safely assume that the bulk of the current national debt was created by the administrations of Ronald Reagan and George W. Bush. The Trump administration is now adding to that debt at a rate that may exceed Reagan and Bush.
We must do something about the debt crisis now because the interest that we pay on the debt is rising. The Congressional Budget Office estimates that unless we do something, the interest will be about $915 billion annually by 2028. This exceeds the military budget.
The solution to our debt crisis is to go back to the recipe from 1946 that we know worked well. We'll need to undo the Congressional favors to the wealthy. Here are a few of the obvious fixes.
Income Tax Rates
Our social inequality is so great that we now have a strata of wealthy Americans who are not paying their fair share. We could use more than one marginal tax rate for them. Here's the existing 2018 Individual Income Tax table showing the rates for Individual filers only - to keep this simple.
|10%||Up to $9,525|
|12%||$9,526 to $38,700|
|22%||$38,701 to $82,500|
|24%||$82,501 to $157,500|
|32%||$157,501 to $200,000|
|35%||$200,001 to $500,000|
We need to add additional margins for high-income individuals. Here's an example of how this can be done and reduce the taxes on the working poor as well. The changes to the original table are highlighted in green.
|0%||Up to $9,525|
|12%||$9,526 to $38,700|
|22%||$38,701 to $82,500|
|24%||$82,501 to $157,500|
|32%||$157,501 to $200,000|
|35%||$200,001 to $500,000|
|45%||$500,000 to $1 million|
|55%||$1 million to $10 million|
|70%||over $10 million|
Update January 2019: U.S. Representative Alexandria Ocasio-Cortez (D-NY) proposed a 70 percent income tax on income over $10 million.
Capital Gains Tax Rates
A big reason why the wealthy escape paying their fair share of taxes is because much of their income is considered Capital Gains and taxed at a lower rate than income. The solution is to treat both short-term and long-term capital gains as ordinary income.
In January 2019, U.S. Senator Elizabeth Warren (D-MA) proposed an annual wealth tax. This essentially is a tax on net worth. The wealthy have sheltered income over the years that can no longer be taxed with income taxes. A wealth tax is a way to compensate for the resulting massive social inequality.
|0%||up to $50 million|
The Republican strategy involves lowering tax rates for income and capital gains and shifting the burden to the poor and middle-class with regressive taxes, such as sales taxes. This is usually done at the state level. It's important that states also tax their high-income taxpayers and lower or eliminate regressive taxation.
Tens of billions of dollars of tax revenue are siphoned away by tax-exempt organizations that do not operate in the public interest. These organizations serve the interests of specific groups of people. They are often political and religious. Congress should have the IRS require all current tax-exempt organizations, earning over a certain amount, to reapply for their status, deny those that clearly don't qualify, and collect whatever back taxes are available.
This will require that Congress increases the IRS budget.
Estate and Gift taxation is a complex topic. It involves both tax rates and exclusion amounts. Suffice it to say that wealthy families have a sweat deal - especially families like the Waltons of Walmart fame.
The Trump tax cuts doubled the estate tax exemption from $5.25 million to $11.18 million and the estate tax rate is the lowest it has ever been.
We need to significantly reduce the exemption amounts and increase the tax rates. Another solution to estate and gift taxation is to use more granular progressive tax rates - perhaps just like income tax.
Update January 31, 2019: U.S. Senator Bernie Sanders (I-VT) proposed a progressive estate tax with a top margin of 77 percent on estates valued over $1 billion. He proposes no estate tax for amounts up to $3.5 million.
|0%||up to $3.5 million|
Wall Street transaction tax
The practice of automated, high-frequency trading in the financial markets puts us all at risk. Many people have advocated for a transaction tax. I agree, though I think the rate should be higher than what's been talked about and tied to the transaction amount.
The Final Word
It took almost 40 years to get to the present national debt of almost $22 Trillion. We need to fix our revenue problems to a sufficient degree that we can protect and enhance the social safetynet while paying down the debt before the interest on the debt makes it impossible to recover.
Treat with skepticism anyone who tells you that these solutions are not going to solve these problems overnight, where the implication is that it's not worth doing. We just need to get back on a sound financial footing and produce budget surpluses year after year.
Office of Management and Budget (OMB) Tables
- Table 1.2 - Summmary of Receipts, Outlays, and Surpluses or Deficits (–) as Percentages of GDP: 1930–2021
- Table 1.3 - Summary of Receipts, Outlats, and Surpluses or Deficits (–) in Current Dollars, Constant (FY 2009) Dollars, and as Percentages of GDP: 1940-2021
- Table 2.1 - Receipts by Source: 1934–2021
- Table 3.1 - Outlays by Superfunction and Function: 1940–2021