Gary North

March 16, 2010

USA Today published a creative interactive chart on Federal taxes. The chart is here:

Put your cursor in the box and type in your annual wage. A chart appears. On this chart is a sloping upward graph of what the equivalent salary would have been, year by year, adjusted for price inflation, 1940 to today. You can see the reduction of purchasing power of the dollar.

At the bottom of the chart are some colored horizontal lines. These are Federal taxes. You can see what you would have paid in any year.

You can see the increase in Social Security taxes over the years, beginning at $29 in 1940.

When you put the cursor on the income line, look at the hierarchical table on the right-hand side: colored boxes. It gives a breakdown of where your tax money went, category by category, year by year.

I chose $45,000, which is about what most households earn today (median).

In 1940, the effective tax rate on today's $45,000 was 4%. In 1942, with World War II, it went to 18%, and that is where it has stayed: 15% to 19%. We never recovered our low tax rate after Pearl Harbor. Even in World War II, it stayed below 20%. It fell back to 15% in 1946, and inched up to 18% by 1960. It was 20% in 1970. For three years -- 1974, 1975, and 1976 -- it rose to 22%, but it fell back.

This is extremely significant. It indicates that there is a Federal tax rate ceiling on the middle class at about 20% that no Administration can penetrate. Any suggestion that an Administration should raise taxes above 20% for the average family is politically nonsensical. Ford did it, and Carter defeated him in 1976. The rate then fell.

The point is this: increased spending above 20% must come from wage earners pulling in more than the average wage. Yet, even here, there are limits. For those making the equivalent of $250,000, the rate was 10% in 1940. It shot into the mid-30% range in 1942. It moved to the mid-40% range after the war. It has only rarely gone to 50%. The last time was in 1983. Since 1986, it has been in the 30% to 32% range.

At $1,000,000, it is still in the 35% range, and has been since 1986. It was in the 65% range prior to Reagan's tax rate cuts and 72% prior to Kennedy's.

So, the Federal government must sell debt to increase spending beyond tax revenues generated from the 20% to 35% range. It must find buyers to run deficits.

We have entered a new era of debt and spending. There is no likelihood of spending cuts. There is no likelihood of major tax cuts or tax hikes. There is a great likelihood of the government pretending that it can sell $1 trillion of new debt, year after year, indefinitely. Then, one fine day, it will not be able to sell it at anything like today's interest rates. The Federal Reserve will then begin to buy with fiat money.

We are beyond the point of no return politically.

This chart deserves wide circulation. Send it to associates.