THE TAX ATTIC with Jerry Coon

Dealing with the federal deficit

Jerry Coon

I listened to a very interesting presentation last week about the history of federal tax rates from the beginning of our income tax system, 1913, through 2011. The tax rates were a maximum of 6% in 1913. They stayed at that rate until the World War I had to be paid for, when they rose to a maximum of 73%. The rates went up and down incrementally until World War II had to be paid for, when they went all the way up to a maximum of 94%. After World War II, we fought the Korean War and the Vietnam War, so those maximum rates stayed high.

The politicians in charge at the time had no trouble increasing the rates to pay for wars. They did not want a deficit to continue. They wanted it gone. The rates did go down to 70% under Presidents Nixon and Carter. Then along came Ronald Reagan. He cut the rates to a maximum of 28%. We have lived with his basic system since that day. It has been a wonderful system—complicated, but wonderful.

The maximum rate has now climbed up to 35%, but that is nothing compared to 94%. Apparently, there was no tea party when the rates were increased to 94%. Or perhaps the politicians back then understood that the deficit had to be paid for and couldn’t just increase infinitely without repercussions.

Since the beginning of our country, the federal government from time to time has run deficits and accumulated debt, but that debt has been paid off as soon as practically possible. Now our federal deficit is over 14 trillion dollars. It won’t be paid off any time soon, perhaps never. How has it gotten so large? There are a number of reasons.

First, we fought the Persian War and numerous small wars, such as the one in Serbia.

Second, we continue to fight the wars in Iraq and Afghanistan and numerous small wars, such as the one in Libya.

Third, various federal stimulus programs have occurred in the last few years.

Fourth, upwards of 20% of our total revenue is now spent on Social Security benefits. The politicians of generations prior to 1940 did not have to deal with this particular reason.

Fifth, Medicaid and Medicare will account for approximately 23% of total spending. Again, prior to 1965, neither of these programs existed.

Sixth, our government itself has grown tremendously in the last few years. You might even say it’s the only growing business in the United States.

These six reasons have given us a 14.3 trillion dollar accumulated deficit. Each will make it harder to balance the current budget. But balancing the current budget must happen before we can start paying down the accumulated deficit.

In addition, regardless of how you feel about federal health care reform, when it begins to be fully implemented, that will be reason seven.

How can the current budget be balanced so we can get on with attempting to pay down the accumulated deficit? According to many experts, our politicians have to step up and take two actions. First, they have to increase taxes.

There are two ways to increase taxes. Increasing the rates is the easiest but a second way is to eliminate selected deductions such as mortgage interest. They don’t have to go up to that 1950s 94% rate, but perhaps increasing the top rate to 50% while lowering the income level that is subject to the 50% and also eliminating those selected deductions will suffice. Eliminating some of the Bush Tax Cuts would also be an alternative.

Second, they must find a way to reign in the increasing amounts of money being spent on Defense, Medicare, Medicaid, and Social Security. Cutting back on the troops in Iraq and Afghanistan will allow the defense budget to be lowered. President Obama just this week announced that by the end of this year, 10,000 troops will be brought home from Afghanistan and 23,000 more will be brought home next year. That move should mean less money will be spent on defense.

Cutting Social Security, Medicare and Medicaid spending will not be so easy. Increasing the age of Social Security eligibility slowly from age 67 up to 70 would eventually decrease Social Security payments. In addition, making benefits payable on a means tested basis would decrease payments for taxpayers with substantial current income. Decreasing Medicare and Medicaid spending will not be easy, but it most likely has to occur. Increasing the age of eligibility might do the trick.

Total spending must be lowered. We do have to find a way to cease setting spending records each year or those deficits will never go away. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at his website at www.actiontaxservice.com.

 

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