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Tax Facts
I took a look at the history of taxes in the USA. A few interesting (to me) factoids. The data comes from the Tax Policy Center (Link); the graphs are mine.
I’ve never been convinced that comparisons of the Depression, to today’s economic conditions, are valid. It was a different economy back then, with a much smaller government. Consider the following that plots taxation as a percent of GDP during the 1930s and 2008-12.
It took a world war to end the Depression, and that period was marked with very low taxes. People argue that taxes are too low today, maybe, but they are already 6Xs what they were the last time the SHTF.
I think the “modern economy” started around 1950. By then, the distortions from the Depression and WWII were unwinding. In addition, Social Security taxation became a meaningful percent of total individual taxation. The following charts look at the components of taxation from 1950 – 2012; the information is presented by President, the tax rates are the average for the respective tenure:
Some observations looking at this:
- I’ve read the arguments that tax rates in the 50’s were very high and the economy did just fine. Not true at all.
- The Clinton years are also pointed to as a period where income tax rates were high, and the economy did very well. This is appears to be correct. Marginal tax rates were higher; this contributed to the increase in total tax revenues. In addition, the capital gains that were generated in the late stages of the DotCom boom supported revenues. The bump in income taxes in 2000 was attributable to a hot stock market.
- The Obama years are marked with low tax receipts as a percent of GDP. The reasons for the drop include: (1) The recession and the drop in payrolls. (2) Losses from investments (houses and stocks) (3) The 2% reduction in Payroll taxes.
Corporate tax rates are at historically low levels today. The persistent argument from corporate America is that tax rates are a too high, and must be lowered if America is to compete in the global economy. There is some truth to this argument. The statutory corporate rate is 35%, but very few companies pay this rate.
Federal excise taxes, as a percent of the economy, are at historical low levels today. This is, primarily, the gas tax.
I don’t “like” any taxes, but some tax revenue is necessary. I particularly hate all income taxes. I favor taxes on consumption, not wages. If the excise taxes the government collects were doubled to equal 1% of GDP, it would generate $1T+ over the next ten-years. Much more than either of the Bush tax cuts that are now up for discussion.
After looking at these charts I conclude:
- Social Security taxes impose a very heavy burden on the economy.
- Income tax revenues are low today because of the economy, not the marginal tax rates. Consider the fall off during the past four years versus the Bush era. Marginal tax rates were the same, but tax revenue, as a percent of the economy, fell. It's the economy, not the tax rates that are the problem. D.C. is focused on the wrong issue.
- It's well past time that a redo of corporate taxation is made. The system is busted. The end result should be a much lower marginal tax rate to insure competitiveness, but also a minimum tax rate that also insures some fairness, and higher net tax receipts.
- Excise taxes have to go up. Sorry.
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Used to do testing for MIL-spec components, if you think the tax code is a morass - try winding your way through the spec requirements and standards for military parts. It's no wonder a $5 Lowes toilet seat costs the military $200. Unfortunately, there are times the requirements are not just the result of bureaucracy run amoc, but trying to see that tree for the forest is impossible. I'm sure some defense contractors make big dollars, but the overhead of paperwork, mil grade testing, audits and the inevitable expedites - I don't think it's as big as it looks from the outside.
It creates a monster gooey gob of government subsidized jobs all over the country. And THAT'S the point.
Add property taxes please
That's local. This is about Federal.
Making the statement that taxes are going to have to rise without talking about expenditures and what taxes are being used for is drawing a conclusion while only considering half of the facts. Maybe it's a foregone conclusion to you that expenditures can't go down but it isn't to me. I know, I know, the government never cuts anything, but the Congress hasn't even passed a budget for three years and still smart people talk about raising taxes like it's obvious to everyone that there's no other way.
There is another way, and while the likelihood that the crooks in office now will ever change is close to zero, smart people like you, Bruce, should not automatically give them the satisfaction of ignoring the other way. Cut f'in expenditures NOW.
Senator Krasting will get right on that...first we half to puff up his ego and make him into something he definitely isn't...nor wants to be.
I think there are several reasons that the economy was so bad in the 30's:
1. Roosevelt's confiscation of gold coins left a hole in the money supply. There was not enough money to pay debts.
2. People didn't trust banks. If Roosevelt could confiscate gold coins, why couldn't he just confiscate bank accounts as well? Lots of people pulled their money out of the banks and stored it under the floorboards. I still have some silver dollars that my great-grandfather pulled out of his bank account in the 30's.
3. People were worried that Roosevelt would nationalize companies. Why invest in stocks when the government might just take them over?
WWII caused people to invest and also buy gov. bonds for patriotic reasons. And after the war, it wasn't too difficult to convert from war to peacetime production. Plus there was a lot of pent-up demand because of rationing during the war. And also, most of our economic competitors were heaps of smouldering rubble. So there was little international competition and our former enemies became customers.
I think tax rates are important, but there are lots of other factors that determine whether the economy grows or not. But people use tax rates as an indicator of how the government views the private sector. If you tax investment income, people feel the government is hostile to investors and they hoard their money not only because their returns are lower, but also because they feel the government is out to get them.
Another drag on investment has been the huge decline in the quality of corporate governance in the past 30 years. Upper management is completely insulated from the shareholders and most corporate earnings are now going to management, not shareholders. And you cannot count on auditors to even accurately report a company's financial position, as todays news with HPQ shows.
Given all these things, there is no real reason to invest in stocks anymore. I personally plan to liquidate my small business, convert to PM's and retire to the hills. Why should I worry and sweat only to give half of my income to the government? Life is too short for that.
30 years ago, many investment firms were parnerships---where partners had skin in the game and were personally liable for bad acts.
Changing from partner to corporate structure inflated the upside and negated the downside...genius. Well, for them.
How's your shoulder?
;)
Actually, very well said. There are so many more moving parts nowadays as compared to the thirties, it isn't really even a comparison. Especially to the corporate (extrapolate to government/corporate...) insulation from the plebes that also has people very, very suspicious. Why should they get away with murder, literally, and then take half our money to fund wars I don't aprrove of and give banksters bonuses that I certainly don't approve of?
The disconnect has gotten extreme and that is why this is really an apples to oranges comparison. The us vs. them mindset is getting more entrenched every day.
:D
Great work, Bruce. I suspected tax receipts were falling, but those charts are shocking. So much for the "recovery."
Don't know where the data base would be, but a comparison of real estate taxes over the span of 1950-now would be revealing. In the small towns I follow, taxes are a prohibitive barrier to home ownership. Bernanke's perversions of the economy have frozen real estate "values", residential and commercial, near the 2006 peaks. No adjustment to reality means no recovery. Even a worm learns, but not Dictator Ben.
Nice article, Bruce.
You put forth a thoughtful assessment.
In some respects, however, I think your observations and conclusions are incomplete.
The tax system should be evaluated not just on what and how money is extracted from the private economy, but also on how it is "injected" back into the economy. Transfer payments (including SSI, food stamps, housing assistance and medicare) to individuals and corporate subsidies are essentially "negative taxes." It would be interesting to see how this information would factor into your observations and conclusions.
Few would gripe about taxes if they got some value for the money ya forked over....
"It took a world war to end the Depression..."
No! Killing human beings and destroying resources and manufacturing capacity is not an economic stimulant! It is a logical fallacy to assume that because A happened and then B happened A caused B.
"It took a world war to end the Depression..."
No! Killing human beings and destroying resources and manufacturing capacity is not an economic stimulant! It is a logical fallacy to assume that because A happened and then B happened A caused B.
True. But you can argue that WWII ended the depression in the US... because the US acquired a vast amount of capital by selling weapons and materiel, and by the end of the war wound up with a significant percentage of the world's monetary gold (even ignoring the rumoured Black Eagle Trust). Furthermore, the rest of the industrial world was almost levelled, meaning US citizens were able to sell even more stuff to them and faced little competition while Europe was expending capital just restoring its pre WWII infrastructure and housing. And of course the US wound up with the exorbitant privilege of having the underpinning currency of the Bretton Woods agreement... and we musn't forget FDR's fascistic economic meddlings were largely reversed by Truman at the end of the war. All of these were the main reasons for the US post WWII economic boom, not the successive US governments' fiscal twiddlings.
Europeans were desperately poor throughout the 50's, though, of course, their GDP was +ve with all the spending going on... and thus, techically, they were out of recession. But that just shows the uselessness of focusing on GDP in the context of rebuilding destroyed wealth.
Even if war was stimulative (it's not, witness rationing, forced reccycling, etc...) it doesn't matter because it is immoral. If you take the path of war for economic or political gain you...are...evil.
But Evil dresses much better than Ethical. And Evil has a really nice car. And check out the place where Evil lives.
Poor old Ethical will never have a lifestyle like that.
Evil needs those things to fill the void where it's compassion and soul used to be. Ethical just needs a good woman, a few drinks and maybe some music to feel good and happy with life.
I guess it's too much to ask Bruce to go read some Rothbard (or Bastiat), as he's too busy spouting Conventional Ignorance.
Or should I say, "channeling Krugman?"
Damn, Bruce. Sometimes you do so well, yet other times, you're so far off base, you might as well be on CNBC.
I'm looking for work, so I'll send CNBC this recomendation. Who knows, you might get me on TV!
Not.
b
perhaps if you channeled your inner Dupont or Rockefeller then and enlighten the rest of us? "War was of no consequence to their business interest"? REALLY? Why do you think you even watch T.V. to begin with? Or live in a "sub-urban"? Or go to College to get an education? "This was all just an accident of history"? Now excuse me while i go watch "Pod-people" (the movie...no i'm not watching you) for the upteenth time.
Oooh, and let's not forget Gloria Steinem and the two-person working family:
Mo' industry (daycare, schools...) and double the taxes! Loves it!
It was a freak of nature, I tell ya!
IN THE FIRST DEPRESSION .... just how much was taken from tax payers and given to the "welfare class" (some are the section 8, SNAP, and LINK recipients, the others work for or in Government in a wasteful endeavor that is essentially a "job" for an idiot), versus what we have TODAY! I argue that the "dustbowl" of the 30's is now the Federal, State, and Local regulations, taxes, and fees (Unemployment, Health, Liability Insurance, and S.Sec. and Medicaid taxes, as well as hundreds of other taxes and fees). The only problem is that unlike the "dustbowl" conditions, this other depression is basically caused by Government, and their parasites, and they won't stop bleeding the host until it is dead.
I don't like taxes but if obama won't cut spending then let's raise all taxes califuckedup style. If everyone was paying they would probably be pissed with the cost of this crappy government. Look at the idiot dumbocrats in NY and NJ after sandy; just as incompetent as that idiot mayor of new orleans. At least those idiots were voted out in the next election but let's see if the people who pay a fortune to live in those liberal utopia's will do the right thing when the next election comes. My guess is they won't but maybe I will be surprised.
"I particularly hate all income taxes. I favor taxes on consumption, not wages."
But, Bruce! You don't understand. If we tax consumption, no one would buy stuff. And if our economy got back on track and interest rates were somewhat normal, then people would save- hence not buy stuff, either!
C'mon! How- how...that's just un-American!
_____:/____
And speaking of, it didn't seem to matter how the taxes were defined in order to make a good economy. They were high in the fifites and under Clinton but the economy did okay. So I wonder what the true metric is for determining a good economy if not tax rates. Could it be the savings rate? An increased savings rate actually creates a better economy? Vice versa? What were the respective savings rates in the '50's and the '90's?
If not that, then what was the real difference between those two economies?
____________
Or was it the use of technology and the false wealth effect that generated the feeling of a better economy? (With shiftier accounting, of course...)
Employment & (inflation adjusted) wages are the core metrics to monitor the heartbeat of a (national) economy.
Taxation has become a four headed monster.....federal, state, local and Fed-induced desecration of purchasing power. I say starve all of the beasts.
I know this is about the feds, but the common man is also screwed by the taxes never talked about in this debate about "only the rich pay taxes" bullshit. Lest we forget over the years that sales taxes that have exploded, state income taxes have exploded, and property taxes, which has expoded. And don't get me started on the licensing fees, etc. etc. etc......
The problem we have is that the beast can no longer be starved.
The USG no longer needs us to feed itself, at least for now. It borrows and then justs gets from Ben. Yes tax revenues help to put off the eventual crisis but until the great unknown trigger is pulled, we are just a nuisance to the government.
Rainman,
I say starve the beasts as well ...... and then leave the game so that they feed on each other. The nature of parasites is to always look for a host to suck the blood from .... let them bleed each other to death. (It is the only compassionate thing to do .... letting them share their misery with their elected politician .... who will be invited to dinner .... just not as a guest but as the main course.
So a dollar is worth a dime. Unless it is a silver dime required to play the future mkts game. Then we're even.
make income taxes 5%, increase excise taxes, cut gov spending by 20% and PROBLEM SOLVED. It's too simple and just for this to ever be considered.
What you are missing is the size of the government, federal, state, and local. In the 50s it was about 26% of the GDP (all three) and today it is 42%.
Also in the 50s federal spending was 17.6% of GDP and tax receipts about 17.6%. Very small deficits, almost no crowding out.
The general rule of thumb is for ever 10% of GDP the government consumes the economy losses 0.5% to 1.0% off the GDP growth number.
Here is a recent blog I wrote addressing this issue and other blogs I wrote. Tyler is welcome to use any of them if I can ever figure out his e-mail address.
http://www.floridapoliticalpress.com/2012/11/20/paul-krugman-wants-a-91-...
Also Hoover raised taxes from 25% to 63%, FDR to 79%. Hoover went from surplus to deficit, increasing spending 47%, passed Smoot-Hawley, and set up the first cartels in agricultural, USDA.
FDR defaulted on Liberty Bonds, caused massive inflation and panic taking gold out of peoples bank accounts and devaluing the dollar from $20.67 to $35 an ounce for gold.
The Fed created the monetary expansion from 25 to 29 increasing the money supply 61.8%.
So while the government was smaller there were huge central planning mistakes that caused the Great Depression. This is just a very small list.
Murray Rothbard wrote a good book on the depression up to 1933.
Crap in the upper post tax collections were 17.2% not 17.6%.
Printing paper money is exactly the same as stealing money.
A voluntary tax would be acceptable, but no forced tax will ever be redistributed equally.
Physics bitchez
I junked you for the hell of it.
Exactly, and the majority of the people don't realize that the "tax" is even happening to them; thus it will continue.