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Average Income Tax Rates and the Financial Health of the Nation.

October 31, 2018

average-effective-tax-rates-by-income-percentiles-1960-2004

The graph that begins this post shows the effective tax rates on individual Americans by income percentile from 1960 through 2007. It does not include the Obama era American Taxpayer Relief Act which reduced the sharp decline in the effective tax rates for the 90th percentile and above incomes and continued the gradual reduction in taxes for the remainder of taxpayers begun in the Clinton administration and accelerated by Bush II. The Trump tax cut of 2017, substantially reduced the Average Effective Tax Rates for the top 90% if incomes to levels even lower than those of Bush II while providing none or at best a minuscule amount of tax relief for the rest of the taxpaying community.

What this all means is that during Republican Administrations taxes on the rich generally go down while for the remaining tax-payers they either go up slightly or remain mostly the same except for Bush II who provided a small reduction for the majority of taxpayers to go along with a substantial one for upper-income taxpayers.

The Democrats, on the other hand, generally try to raise taxes substantially on the wealthy while providing the remaining taxpayers a small reduction.

So what, one may ask.

Well, for one thing, it seems that shortly after the tax cuts on the wealthy the nation’s economy goes into a tailspin that has to be corrected by either raising the taxes of the wealthy (and other taxpayers) again or by transferring governmental tax receipts in order prop up the financial industry again.

For another, there seems to be a correlation between reducing the effective tax rates on higher income individuals and reductions in the nations real GDP growth rate.

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To pay for those “Upper-income tax cuts,” and the resulting economic slowdown, one must either use federal funds earmarked for other programs such as Social Security; or borrow more, risking higher interest rates on governmental debt payments that may squeeze out other expenditures (e.g.  national security): or raising the rates on the wealthy back to where they were. Democrats, of course, favor the last. I suspect the Republicans favor the first and neither favors the middle approach.

Why we risk the Nation’s welfare going back and forth on tax rates for the wealthy I will never understand other than it is perhaps the most intractable issue in politics historically: Who gets to pay for the government the nation needs and wants.

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