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Tammuz Tales: Taxes, Personal Income and Federal Debt (or: The Rich and the Rest)

My current Forward column, “For Source of Debt Crisis, Look to the Tithes,” tries to make the simple point makes that we have a federal debt crisis because we have lowered taxes over the past 30 years and created a federal revenue base that’s simply not enough to pay our bills. My second point is that lowering taxes hasn’t resulted in faster economic growth, nor in greater prosperity for all levels of taxpayers. What it’s accomplished is a fairly direct transfer of funds from the federal treasury to the pockets of the wealthiest Americans.

The numbers, as I state several times in the column, are stunningly straightforward. Here are some of the sources where the original numbers can be found.

Here is a year-by-year look at the top marginal tax rate on highest levels of income, from the liberal-leaning Tax Policy Center. Here is a more detailed chart from the conservative-leaning Tax Foundation, which is a little harder to read (though you can pump it up by clicking the PDF version) but has the added benefit of showing the income level at which each tax higher marginal rate kicks in.

Here is a series of charts showing the national debt, year by year, through September 2010, on a U.S. Treasury website. This one , from a private blog by a business person, offers the same information, apparently with equal reliability, and has the advantage of showing all the years in one long list instead of making you jump from page to page as the Treasury version requires.

If you compare the rise and fall of the top tax rate since World War II with the growth of the national debt, there is a pretty straightforward connection: As the maximum tax rate on the wealthiest earners came down, the debt climbed. When the top rate went back up, the debt leveled off. The one time that the debt leveled off after the election of Ronald Reagan was during the Clinton presidency, when the top tax rate went up sharply (and to a lesser degree during the first Bush administration just before that, with a more moderate bump). People will try to tell you it’s really too complicated for ordinary folks to understand, but there’s a very simple principle at the heart of it: If you collect more money, you have more money and at the end of the day you will owe less money.

There are basically three periods of most rapid growth in debt since World War II: First, the late 1970s, coinciding with the Arab oil crisis, with its destructive effect on the U.S. economy (that period was also marked by runaway inflation, so that much of the debt increase appearing in the chart between 1975 and 1980 is only nominal, not real). Second, the Reagan administration, 1981-89, with radically lowered taxes and radically increased defense spending. Third, the second Bush administration, 2001-2009, with further tax reductions and massive, unbudgeted military spending. Note that the debt doubled during Bush’s term, without a peep from Republicans. Now they’re all hot and bothered about the insupportable debt, like it just materialized in January 2009.

(This cool chart, by the way, shows which foreign governments own how much of our debt as of this year, courtesy of the U.S. Treasury.)

And here, again courtesy of the Tax Foundation, is a chart showing the proportion of national income that goes to each segment of the population. It’s a real shocker: It shows the steadily galloping increase in the proportion of all income going to the top 1% and the plummeting share going to the bottom half, to the point where the richest 0.1% (one-tenth of one percent) of all Americans, about 300,000 people, now collectively take in about the same amount per year as the bottom fifty percent of the population, or about 150 million Americans.

A pretty good summary of the roots of the debt crisis, published in the Washington Post June 28, is this piece written by Phil Angelides, former California state treasurer, who chaired the Financial Crisis Inquiry Commission. He does a pretty good job of tying together the current hoo-hah over the national debt, the ongoing crisis of the financial collapse and recession and the longer term transfer of wealth and financial power from the middle class to the very wealthy.

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