Did you know?

With all this talk of debt limits, we the lay people get a special peak into the political chaos surrounding the US budget. A lot of the elements that are typical of an American budget debate are missing, however. University political scientists will tell you with disdain that it's a sign of how far right the political base of America has shifted. Republican leaders insist to the press that this is how much the people have come to mistrust Big Government with their money. Both seem to be playing counterpoint, but they're really just talking about two sides of the same coin. The annual budget has grown astronomically as a percentage of GDP (note that the CBO graph I just linked to offers much more conservative views of government spending than this one by Paul Ryan supporters).

Democratic pundits claim that income tax revenue has fallen dramatically since the Tax Reform Acts in the 1980s. Even so, government programs (and therefore, government spending), have continued to rise unabated. Even as recently as 1981, highest earners expected taxation rates as high as 70% of total earnings!! This was the status quo for two decades, a sigh of relief compared to their previous levels of taxation. For the highest earners before 1964, it was 90% of yearly earnings! How did the 1980s implementation of such a different system of taxation affect our government?

When talking about our historically low tax rates, Democrats typically refer to tax rates in the 1960s... Which country's income taxation rates are we referring to here? Even in 1960, when the the average household was earning somewhere around $35,000 a year, their income tax was 44.5%! That means they paid nearly half their income in taxes! That's not a lot of discretionary spending money left to the family by today's standards. The equivalent of the 60th percentile nowadays pays a meager 25% of income. That's nearly half the amount, and the next highest quintile is also covered by that percentage and the 28% tax bracket. That brings up another odd point about taxation rates in our country nowadays: married couples earning $70,000 pay the same percentage on taxes as people earning nearly twice their levels (up to $139,000 pay the same percentage)! Our country has grown a great deal richer, but actually pays less percentage-wise, in taxes. That begs the question, how is it that taxation rates now resemble the 1960s, when taxation rates were so much higher back then?

I've found graphs from 3rd parties that describe the above situation, but I've grown tired of using graphs from sources that aren't necessarily deserving of trust. Whether or not the government defaults, their graphs are the best; the data gold mine. I want to examine government income tax revenue. 

All data from IRS.gov

There's total government income (which includes not only income tax, but corporate, commodity, etc), which seems to rise steadily until 1994 where it really takes off... until a sharp fall in 2001 (tax cut?). Looking through the federal tax brackets, it's difficult to find any reason for the steady increase of government income tax revenue. Now let's take a look at total income throughout America compared to the total income tax the IRS took in:

Income tax has never made a huge dent in the total personal incomes of Americans. Although it might seem from this graph that the percentage of income tax taken into government coffers compared to total income has gone down... it's actually at about the same levels as the 1960s (there it is!). And compared to total GDP, income tax revenue stands at just a percentage point below the average (let's keep in mind though, that a single percentage point adds up to A LOT of money at these levels).  The conclusion? Despite a tax bracket system that seemed much more severe, the 1980s on have seen very little change in the percentage of total income earned to taxation, in fact, that percentage has been higher on average than in previous decades!

I'm left wondering a few things: What's the deal with those crazy percentages for tax brackets before the 1980s? My guess would be a huge reform of the tax code in the 1980s which took away many of the complicated deductions allowing people to avoid actually paying over 50% of their yearly income in taxes. Otherwise, the amount of money going to government coffers in the 1960s would have been much greater than they were.

What conclusions can we draw from all of this? Income taxation (and therefore government revenue) may be lower than it was in the '90s, but that still doesn't excuse the massive increase in government spending compared to total tax received. Of course, we haven't been looking at other forms of taxation (corporate, commodity, excise, etc)... have those levels changed dramatically in recent years? Should government be limited in the amount it spends related to GDP? That makes a lot of sense, after all, a government shouldn't spend more than it's people are generating. But if there's a limit, what's the target? Is government efficient when it comes to spending? I tend to think that private forces are more efficient than the public sector, but that this does not necessarily mean that public forces are unnecessary. Despite being less efficient, public services are extremely important when a service needs to be provided universally on moral grounds. Either that, or a private provider needs to be heavily monitored and regulated by the government when providing a universal service (as in the case of electrical services through PG&E).