Low Tax Policy and National Debt

When reading headlines about Greece and Ireland in debt crises, we see photographs of the leaders of the world bamboozled.  These disturbing pictures of educated men crumbling under the weight of unadulterated lies told to them by other supposed educated men who study such things should trouble us.  When a man such as Alan Greenspan, the celebrated hero of the Neocon deregulation and “low-tax” revolution engages the “liberal” press out of retirement, and states his philosophy of deregulating debt was wrong, that he caused a destruction of wealth the likes of which the world has never seen, how are we to proceed?  How are we to proceed with any advice from a man that has been horribly wrong, yet claims to be incredibly enlightened?  As the leader of a business, would you take the advice of a man who had made a mistake that had nearly bankrupted you, but had claimed that he had learned from the experience?

Like any other business, our government maintains a balance sheet of outstanding debt and incoming revenue; however, many continue to discount the reality of the numbers on this sheet, or their relevance to us.  The reasons for this vary widely.  Previous generations cited our military might and strategic positioning in the world as reasons that the faith and credit of our nation was one of the strongest in the world.  And many of the same economists that believed the market had a steady hold on the credit default swaps and the mortgage bubble still believe that the market has a steady hold on our debt, which is “marketed” to foreign countries and investors in the form of Treasury Bills.

The truth is neither of these insurance policies are good ones.  Economists can no more predict the outcome of particular financial instruments than they can the results of a Poker game.  As evidence, I cite that there are as many bankrupt traders as there are rich ones.  However, the wiser ones are typically the poorer ones.

As far as our military might is concerned, the number of nuclear powers in the world is increasing, despite our attempts to control it, and a nuclear threat from another nation is an inevitability.  As far as our tactical infantry and fighter planes are concerned, I will allow others to gauge their success in recent history, particularly in Afghanistan, where we continue a war for a decade against the likes of everyday mad men with machine guns.

The truth is, the days of coercing others to invest in our economy, and/or proving that others will always invest in our economy through the use of sophisticated mathematical formulas are clearly numbered.  The world today is smarter than that, and the playing field is much more level.  The lesson of history is that every great empire eventually falls.  The difference between America today, and the Historical America that many today seem to dream about and long to see restored, is that Historical America seemed much more aware of the possibility of its failure. While I don’t want to be particularly morbid about our eventual failure, I do want to confront the American psyche: we cannot always be the only game in town, militarily speaking or economically, and the idea that we are is toxic.  It is this attitude of self-sufficiency, invincibility, and even entitlement that lead to the current crisis that we are all facing, and it has lead us down horrible roads in our history as well, from the peculiar institution to the genocide of this continent’s indigenous people; it will only prove to annihilate us the tighter we grasp to the idea.

There has been much talk about tax policy, and not surprisingly many are clinging to the idea that we can continue to have other countries that are working much harder than us pay for our way of life.  This too is one of the greatest lies that has ever been told.

Historically and during one of the most industrious and prosperous times in our nation’s history, the most profitable members of our society bore the burden of our government’s bills through higher taxation.  This much is entirely clear from observing tax rates from the past century.  In 1917, due to debts incurred from WWI, the top tax bracket of those making over $2,000,000/yr (approximately $34,000,000 dollars in today’s money) was 67%.  Post WWII, that top bracket tax rate surged to 94% for those making $200,000 (or $2,000,000 per year in today’s money).  The top tax bracket stayed above 70% until 1980, when the Reagan administration dropped the tax rate in the top bracket to 28% over the course of its tenure.  It’s not surprising these drastic changes to our tax law have increased the debt burden on our government tremendously.

One might think that this type of policy might have increased personal savings rates because people had excess money on hand, but peculiarly, those also decreased in the same time frame (until recent months, when we entered the Great Recession.)

To be clear, personal savings rates can also mean that people are paying down debt, it is simply money that is not being spent on goods in the economy.  When the savings rate went lower, that may have meant that all the excess money people were given was being spent, but it may also have meant that people were getting poorer by eradicating existing savings and/or borrowing to buy more goods.

This is why I do not consider government spending as a percent of GDP a valid utility in assessing government spending, although I have seen this statistic published numerous times since the recession took hold as justification for our current tax rates and current level of spending.  One of the main components of GDP is private consumption.  To increase the size of GDP, you simply get people to consume more goods (and borrow more money).  Clearly, just because private citizens are spending more money, does not mean the government should also spend more.  We can see this by the accumulation of public and private debt in the past 30 years.

Popular statistics to trend wealth track household income year over year; these show a modest positive gain in wealth during the 1980’s.  However, this might be misleading.  Why is this?  During the 80’s there was a vast reordering of the number of people in the workforce per household, especially as more women were entering the workplace.  Divorce and a move away from the typical family model is also cited many places, which could have decreased the number of persons per household.  This all could have added up to a wash, but I’m not sure we’ll ever know.  (Because of this breakdown of the family, the other common statistic –per capita income– would also be misleading, as people were having fewer children.)

I hear your question.  Could people have actually been getting monetarily poorer, despite an overall break in taxes for everyone?  Is this possible?  I will leave it for you the informed reader to make that determination.  However, I’m not sure that it really matters, as it is clear that lower taxes for the top tax bracket did not make any other tax bracket in terms of percentage increase in income as wealthy as the top one.  According to Wikipedia, for the period of 1967-2003, “the income of the 95th percentile [in the US] grew 15.2% faster than that of the 80th, 146.8% faster than that of the median and 159.9% faster than that of the 20th percentile.”  The top 1% experienced the greatest gains of anyone, and the share of income held by the top 1% was as large in 2005 as it was in 1928.  Strangely, in 1928, the highest tax rate for the wealthy was similar to what it is today, and even a little lower at 25%.  After the stock market crash in 1929, it took three years for the tax rate for the wealthy to correct back to 63% in 1932.

Presently, both Ireland and Greece today tax their highest tax bracket at 41% and 40% respectively, a rate that we have not used since 1985.  These countries also carry a VAT which is similar to our state/local sales tax.  It’s interesting that the Greece austerity measures include items like freezing Greek pensions for 3 years, and increasing the retirement age for working mothers, while they are only willing to increase income tax on the highest tax bracket by 1%.  In Ireland austerity measures propose tax rates for the highest earners remain below 52%.  Meanwhile similar cuts for working class people in terms of pension reductions, and an increase in the VAT (which effects lower income earners more) have been implemented.  In the mean time, Ireland’s economy has tanked.

My conclusion from this data is that history is clear in these matters, either the richest among us must bear the burdens of society –the one which they leverage progressively more as they earn more money from it– or we must learn to live with a lot less as a society.  When our wealth is poured in huge black pools of private investment, where it is not spent, or worse yet, used to pump up the consumerist economy for its own financial gain, we do nothing more than lose our savings, and our children’s savings.  I’m sure others may draw other conclusions, but I’m interested to hear counter arguments.