What Is the Right Tax Rate?

One of the important issues facing our country is how to fund the cost of governance.  Money raised through income tax is used to pay for the programs, benefits and services provided by the US government for its people.  One approach is to reduce the services and benefits by reducing the amount of operational funding.  Another approach is to raise tax rates on different sectors of the population.  A third approach is to do some combination of the above.

It is essential that we reduce costs and eliminate waste, fraud, and abuse. This is a necessity in business and government.  The challenge arises when one group’s necessary costs are viewed as waste by another group.  Fixing a damaged bridge may be a local necessity but is considered wasteful by another community that needs to replace a collapsed bridge.

Rather than enter a debate on waste, it may be easier to enter a debate on adequate taxation. How much is enough? Should some pay a larger share than others? This debate is the current argument facing our political parties.

So here are some facts on which to base our decisions (from the IRS):

1.  The top rate for the richest in 1945 was 94% of income and 22% for those at the bottom of the earning ladder.

2. The tax rate remained above 70% for the top earners until 1981 when it was lowered to 50%.

3. The tax rate for top earners is now 35%. This the lowest it has been since 1926 – just before the great recession and stock market collapse of 1929. Top rate taxes were lowered from 44% in 1926.

4.  The bottom 50% of the population earn 13% of the nation’s wealth and pay 3% of the nation’s taxes. The top 50% earn 84% of the nation’s wealth and pay 97% of the tax bill. The top 10% earn earn 46% of the wealth and pay 70% of the taxes.

So what do these data show?  The tax rates have varied over the nearly 100 year history of income taxes in the United States.  Richer individuals have always paid a larger share and carried a greater tax burden.  When tax rates on the richest have fallen, the economy has similarly fallen (this is not necessarily causative).  Tax revenues decrease when the rates fall (this is causative).

To adequately fund government to provide necessary services, more funds are needed than is being currently collected.  In addition to reducing costs, income flow must be increased.  The current low rates on the upper income groups and the potentially rising rates on the lower income groups are not meeting our current financial needs.

That’s my two cents worth.


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