Monday, February 14, 2005

Marginal Tax Rates and the National Debt

At the end of World War II, the US government had a debt of more than 100% of GDP.

The top marginal tax rate back then, which held steady through a two-term Republican Presidency and a brief period of Republican control of the House of Representatives, was about 90%.

By 1960, the federal debt fell to about 55% of GDP. Lo and behold - along comes President Kennedy, who cut the top marginal tax rate to 70%.

By 1980, the federal debt burden had continued to shrink - hitting a low of 32.5% of GDP in FY 1981. Along comes Reagan, who successively cut the top marginal tax rate all the way down to 28%.

The debt soared, doubling as a fraction of GDP in 12 years. George Bush increased the marginal tax rate to 33%, and then Clinton increased it to 39.5%.

Lo! The debt fell again. But by this time, an important divergence has occurred. The "Gross debt", which includes obligations to various trust funds including Social Security, fell to 57.5% of GDP, while the "Public debt" fell all the way down to 33% of GDP. With the growing SS trust fund, it has become important to differentiate between the "real" debt, which includes the trusts, and the "public debt", which does not.

Along comes George W. The top marginal tax rates are cut again, along with cutting dividend taxes by more than half, and planning to phase out Estate taxes at the end of a ten year window, for just one year. With a tailwind of Social Security surplusses, the tax-cutting faction went into overdrive, with many, including the Heritage foundation, opening a line of attack to disavow the SS trust obligations to Social Security beneficiaries.

But lo! Debt as a fraction of GDP is growing quickly again. The White House official estimate shows gross debt hitting 70% of GDP by the end of the decade, and that doesn't even include the cost of making Bush's tax cuts permanent, nor the ongoing costs for military operations and the like.

And lo! The President proposes to finance privatizing Social Security by issuing "transitional" debt that might reach 30% of GDP, as well as pissing away the SS trust assets (for a total increase of the publicly held debt around 60% of GDP).

That would bring our federal debt back up around the level at the end of World War II.

Do you suppose that the "deficits don't matter" faction of the GOP will continue to reign supreme as our debts approach the level required to win a World War? Or will traditional conservatives regain control of the GOP, and use traditional methods of paying down debt?

Signs suggest some conservatives would rather avoid letting the debt get that high again unless there's a real national emergency that calls for it.

It seems that some traditional conservatives might prefer to take a stand while the federal debt burden remains reasonable, but if they lose now, 90% marginal tax rates might come again, brought to you by a GOP majority in 2045.


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