What Goes Up Must Come Down

Last week I came across a report from the Congressional Budget Office on deficit projections.  The gist of the report is, the deficit is dropping at a higher rate than previously projected.  The current deficit is at approximately the same level as when President Obama took office and if the trend continues, the deficit will continue to decrease for the next 10 years.  The report also shows that healthcare and medicare costs are decreasing and will continue to decrease for several years, at least until my generation hits retirement age, then these costs will become a major issue.

I've been waiting for some type of response from the government or the media on this report, but mostly it has gone unnoticed.  The Republican party is completely incapable of seeing any news that might reflect favorably on the Obama Administration.  Maybe if we had a Marine hold an umbrella over it they would notice.  The few words from the Democrats show concern that the deficit is dropping too fast, so we need to increase spending to protect the economy.

The deficit decrease comes from three sources: reductions in government spending, an improving economy and elimination of some tax cuts for the wealthy.  With all the screaming I've heard over the past four years about out of control deficits, I wish I could say I'm surprised those same people aren't stepping up and saying "we were wrong".  Instead they are going crazy over umbrellas.

At its recent peak, the federal debt was the highest it has been since the end of World War II when compared to gross domestic product (GDP).  Here is a fascinating graph (if you're the sort to become fascinated with graphs) showing this:

You will notice how World War II caused a significant spike followed by 30 years of decreased debt, which bottomed out at the end of our involvement in Vietnam and then remained steady until President Reagan took office.  For the next 15 years the debt increased, followed by 5 years of reductions during President Clinton's second term.  The debt increased slightly during President GW Bush's time in office and then took a dramatic leap.  Now time for the explanation.

During World War II our GDP dropped significantly while government spending skyrocketed.  After the war, GDP leaped ahead and continued to grow for the next 25 years.  Even with the wars in Vietnam and Korea, increased GDP, a thriving economy and high tax rates for the top income brackets caused a steady reduction of public debt.  What changed?  In 1980, President Reagan took office and one of his first acts was to reduce taxes for the wealthy.  The theory, commonly referred to as "Reaganomics" was that if the wealthy had more money, they would spend it in ways that would help the middle and lower classes.  Strangely, it didn't work that way.  GDP fell as the wealthy sought more ways to maximize their wealth.  Manufacturing jobs were shipped overseas to save labor costs, further reducing tax revenues.  Meanwhile, welfare and unemployment costs continued to rise.

Throughout the Reagan years and President Bush's one term debt continued to grow until President Clinton's tax increases brought about a significant decrease.  During President GW Bush's time in office, tax cuts for the wealthy were partially offset by a healthy economy (brought to you courtesy of the Clinton years, however increased military spending caused a steady increase in debt, which began to skyrocket when Wall Street melted down.

From 1936 through 1980 the top tax bracket in the United States never dropped below 70% with a high of 94% in 1944 and 1945.  In 1981, this dropped to 69.125%, then dropped to 50% until 1987 when it reached 38.5%.  From 1988 to 1991 the rate dropped to 28%, a level not seen since the Great Depression.  There was a slight increase to 31% for 1991 and 1992 and then President Clinton took office.  From 1993 until 2000 the top rate remained at 39.6%.  A drop to 39.1% happened in 2001, followed by a drop to 35%, which is where it remained  until the recent increase back to 39.6%.

The problem with changing the top tax rates is the delay factor.  When you cut the rate, nothing appears to happen, so you cut it again, and again and again.  By the time a problem becomes apparent, the rate is much lower than where the problem first began.  Rather than backtracking and undoing the changes which brought on the problem, the reaction has been to find other solutions.  If your kids are playing baseball in the backyard and your windows keep getting broken, the problem isn't going to be fixed by buying new bats.

Unless your taxable income is over $379,150 an increase in the top tax rates will not affect you.  If your taxable income is over that level, you can decrease your tax burden by investing in your business or investing in your community.  It's time to realize that the deficit problem we are dealing with has one, and only one, simple solution.  Undo the tax reductions that brought us into this mess in the first place.