Chapter 8: The Myth of Over-Taxation

AMERICA’S SPENDING AND TAXING

An Easy Sell—Americans are Over-Taxed

Taxes are the product of politics, and in politics, there is no easier sell than convincing voters that they are over-taxed; it is like convincing six-year-olds that ice cream is good for them because it tastes good, and the higher the fat and sugar content, the better the taste. Inbred in most taxpayers is the belief that they pay too much in taxes of all kinds.

If pressed, however, few taxpayers can define what being over-taxed means beyond they are paying more than they want, and few politicians dare to question taxpayer wants regardless of whether the wants are merited. Imagine how much easier it is to devise a myth that Americans are over-taxed compared with devising a myth that Americans are under-taxed when in fact the latter is true. As with most myths, the truth eventually wins out, but eventually can be a very long time. Since few have an incentive to debunk the myth that Americans are over-taxed, it should come as no surprise that it takes quite a while for the truth that Americans are under-taxed to surface.

Determining whether Americans are over-taxed or under-taxed depends on understanding two truths:

• America must pay for its spending.
• There are limits to how much America can borrow.

Since 1981 America has for the most part spent as much as it liked, taxed as little as it liked, and put the difference on the cuff, but now the bill threatens to come due.

America’s Spending

Government must pay for what it spends, even if the spending is wasteful and/or foolish, or lose its credit. No sane creditor at either the individual or government level will loan to a deadbeat. Loss of credit can be fatal to a government (particularly one like America that owes a national debt of over $20 trillion) and would have a devastating effect on the economy. So, to avoid loss of credit, government must pay up for what it has spent, and paying up means some combination of borrowing and taxing.

Over more than the last half century, government has spent annually as much as 24.3% of GDP in 2011 and as little as 16.6% of GDP in 1965, as is shown on Table VIII-1.

Table VIII-1 Government Outlays by Function as a Percentage of GDP for the Period 1961-2014
Year	National Defense	Education, Training, Employment, and Health	Social Security, Medicare, and Veterans’ Benefits	Physical Resources	Net Interest	Other Functions	Undistributed Offsetting Receipts	Total, Federal Outlays
1961	9.1	3.9	1.5	1.4	1.2	1.6	-0.9	17.8
1962	8.9	3.9	1.5	1.5	1.2	2.1	-0.9	18.2
1963	8.6	3.9	1.5	1.3	1.2	2.3	-0.9	18.0
1964	8.3	3.9	1.4	1.4	1.2	2.5	-0.9	17.9
1965	7.1	3.7	1.4	1.6	1.2	2.4	-0.8	16.6
1966	7.4	4.0	1.5	1.7	1.2	2.2	-0.8	17.2
1967	8.5	4.5	1.6	1.8	1.2	2.0	-0.9	18.8
1968	9.1	4.8	1.8	1.8	1.2	2.0	-0.9	19.8
1969	8.4	4.8	2.0	1.2	1.3	1.8	-0.8	18.7
1970	7.8	5.0	2.2	1.5	1.4	1.6	-0.8	18.6
1971	7.0	5.3	2.9	1.6	1.3	1.5	-0.9	18.8
1972	6.5	5.5	3.3	1.6	1.3	1.5	-0.8	18.9
1973	5.7	5.3	3.5	1.5	1.3	1.8	-1.0	18.1
1974	5.3	5.3	3.8	1.7	1.4	1.6	-1.1	18.1
1975	5.4	6.1	4.7	2.2	1.4	1.7	-0.8	20.6
1976	5.0	6.2	5.2	2.2	1.5	1.5	-0.8	20.8
TQ	4.7	6.1	4.9	2.0	1.5	2.0	-0.9	20.3
1977	4.8	6.0	4.9	2.0	1.5	1.7	-0.7	20.2
1978	4.6	6.0	4.6	2.3	1.6	1.7	-0.7	20.1
1979	4.5	5.9	4.5	2.1	1.7	1.6	-0.7	19.6
1980	4.8	6.3	4.9	2.4	1.9	1.6	-0.7	21.1
1981	5.0	6.4	5.1	2.3	2.2	1.5	-0.9	21.6
1982	5.6	6.5	5.2	1.9	2.6	1.5	-0.8	22.5
1983	5.9	6.5	5.5	1.6	2.5	1.7	-1.0	22.8
1984	5.8	6.1	4.8	1.5	2.8	1.4	-0.8	21.5
1985	5.9	6.2	4.8	1.3	3.0	1.6	-0.8	22.2
1986	6.0	6.1	4.5	1.3	3.0	1.6	-0.7	21.8
1987	5.9	6.0	4.5	1.2	2.9	1.3	-0.8	21.0
1988	5.6	5.9	4.4	1.3	2.9	1.1	-0.7	20.6
1989	5.4	5.9	4.3	1.5	3.0	1.0	-0.7	20.5
1990	5.1	6.1	4.4	2.1	3.1	1.0	-0.6	21.2
1991	4.5	6.4	4.9	2.2	3.2	1.2	-0.6	21.7
1992	4.6	6.4	5.6	1.2	3.1	1.2	-0.6	21.5
1993	4.3	6.3	5.9	0.7	2.9	1.2	-0.6	20.7
1994	3.9	6.1	6.0	1.0	2.8	1.0	-0.5	20.3
1995	3.6	6.1	6.1	0.8	3.1	1.0	-0.6	20.0
1996	3.3	5.9	6.1	0.8	3.0	0.9	-0.5	19.6
1997	3.2	5.7	6.1	0.7	2.9	0.9	-0.6	18.9
1998	3.0	5.6	5.9	0.8	2.7	0.9	-0.5	18.5
1999	2.9	5.5	5.6	0.9	2.4	1.0	-0.4	17.9
2000	2.9	5.4	5.6	0.8	2.2	1.1	-0.4	17.6
2001	2.9	5.4	5.9	0.9	2.0	1.0	-0.4	17.6
2002	3.2	5.8	6.3	1.0	1.6	1.1	-0.4	18.5
2003	3.6	6.0	6.5	1.0	1.4	1.1	-0.5	19.1
2004	3.8	6.1	6.2	1.0	1.3	1.1	-0.5	19.0
2005	3.8	6.1	6.2	1.0	1.4	1.1	-0.5	19.2
2006	3.8	6.2	6.0	1.2	1.7	1.0	-0.5	19.4
2007	3.8	6.0	6.3	0.9	1.7	0.9	-0.6	19.0
2008	4.2	6.3	6.5	1.1	1.7	1.0	-0.6	20.2
2009	4.6	7.6	7.4	3.1	1.3	1.1	-0.6	24.4
2010	4.7	7.3	8.8	0.6	1.3	1.2	-0.6	23.4
2011	4.6	7.2	8.5	1.1	1.5	1.2	-0.6	23.4
2012	4.2	6.7	7.9	1.3	1.4	1.1	-0.6	22.0
2013	3.8	6.2	8.3	0.5	1.3	1.1	-0.6	20.8
2014*	3.6	6.5	8.6	0.6	1.3	1.0	-0.5	21.1
Source: Data extracted from 2012 OMB Budget, Historical Tables, Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017
Notes: *OMB Estimate

The 24.2% of GDP high point of government spending in 2011 was overstated because GDP growth suffered a loss after the Great Recession of 2008 and spending on social programs (such as Medicaid, food stamps, and unemployment insurance) ballooned to counter the effects of the Great Recession; the 16.6% low point of government spending in 1965 was understated because of the rapid growth in GDP during the early 1960s and spending on Medicare had not yet taken effect.

With all the ups and downs, total government spending between 1961 and 2014 averaged 20.0% of GDP. Counterintuitively, during Lyndon Johnson’s Great Society in 1965-1969 (the Golden Age of Big Government), the average spending of government as a percentage of GDP was a below-average 18.9% while the average spending of government during the Reagan Administration in 1981-1989 (the Golden Age of Conservatism) was an above-average 22.3%.

Retirement programs, including Social Security, Medicare, and veterans’ pensions, account for all the increased cost of government over the last generation. In 1989 (the last year of the Reagan Administration), the cost of retirement programs was 4.3% of GDP and government spending (other than retirement programs) was 16.2% of GDP. In 2013, the cost of retirement programs had almost doubled since 1989 from 4.3% of GDP to 8.3%, and government spending (other than retirement programs) had fallen from 16.2% of GDP to 12.5%, or 3.7% of GDP less than it had been under the Reagan Administration. Had the cost of retirement programs been 8.3% of GDP under the Reagan Administration as it was in 2013, the total cost of government during Reagan’s two terms would have averaged 25.8%—far and away the highest cost of government during any eight years stretch since the end of World War II.

As the incomes of almost all Americans remain static or falling, Social Security and Medicare, as a practical matter, will be the only sources of help for all but a few retirees. Retirement savings for almost all Americans has gone the way of VHS tapes, an outmoded relic of a past economy. For private retirement savings to be practical, 90% or so of Americans must either earn much more income or cut a big chunk of their current consumption, a dubious prospect in today’s economy. Even with governmental retirement benefits kept at current levels, Walmart and Home Depot will have no problem finding eager, elderly workers trying to supplement their retirement incomes. As ruthless as the tax game is, the fight over any effort to cut spending on Social Security and Medicare can be expected to be far fiercer than anything relating to taxes.

For the last half-century through the Cold War, the Vietnam War, two Mideast Wars, the Afghanistan War, the addition of Medicare in 1965 and its prescription drug supplement in 2003, several recessions, periods of high and low inflation, stock market bubbles, the parade of liberal governments and conservative governments, and periods of relative domestic turbulence and calm, Americans have spent on average about 15.1% of annual GDP (exclusive of retirement programs) on government. There is no reason to believe that Americans will be willing to cut non-retirement government spending much below the current 12.5% of GDP (which is already below the half-century average of 15.1%). Adding the cost of retirement programs, between 8% and 9% of GDP, to the other cost of government means that its overall cost can be expected to be at least 21% of GDP and rise with increases in pension costs.

America’s Taxing

America has failed to match its zest for spending with a similar enthusiasm for taxing, at least since 1981. Graph VIII-1 shows a history of America’s willingness to tax to pay for what it spends from 1946-2011.

Graph VIII-1 History of Taxing and Spending 1946-2011

Source: Data extracted from OMB 2016, Historical Tables, Table 2.3, RECEIPTS BY SOURCE AS PERCENTAGE OF GDP: 1934-2020.

As Graph VIII-1 shows, current taxes (1) mostly paid for current spending from 1946-1974, (2) failed to pay for current spending from 1975-1980, (3) almost paid for current spending in 1980, (4) failed to pay for current spending from 1981-1997, (5) not only paid for current spending but paid down the national debt from 1997-2002, and (6) have failed to pay current spending from 2002 onward. The greatest shortfalls in taxes relative to spending occurred first following the Reagan tax cuts of 1981, continued through 1997 when the Clinton tax increase of 1993 kicked in, again following the Bush tax cuts of 2001 and 2003, and have continued through to the present. Politically, spending is easy and taxing is hard.

Taxing Since 1981

From 1981 through 2012, there were four major bouts in the tax game between the tax cutters and the tax raisers along with quite a few minor bouts in between. The tax cutters won the first bout by the tax cuts enacted by President Reagan in 1981; the tax raisers won the second bout by tax increases enacted by President Bill Clinton in 1993; the tax cutters won the third bout in two rounds with the 2001 tax cuts and the 2003 tax cuts enacted by President George W. Bush; and the tax cutters and tax raisers split the difference in 2012 in the fourth bout enacted by President Barack Obama in 2012.

Bout #1 – The Reagan Tax Cuts included the following major components:

• A 23% cut in individual income tax rates, where the top tax rate fell from 70% to 50%, phased in over 3 years;
• Accelerated depreciation deductions for businesses buying equipment;
• A 10% exclusion on income for two-earner married couples ($3,000 cap);
• Liberalization of IRAs;
• Expanded provisions for employee stock ownership plans; and
• A 15% net interest exclusion for taxpayers ($900 cap).

In 1982 and 1984, President Reagan enacted two tax increases which took back several of the benefits granted by the 1981 law but left the tax rate reductions in place.

Bout #2 – The Clinton tax increases included the following major components:

• An increase of the top two individual income tax rates from 28% and 33% to 36% and from 35% to 36.9%;
• Subjecting all wage income to the 3.6% Medicare tax;
• An increase of the gas tax by 4.3 cents a gallon;
• An increase of the amount of wage income subject to Social Security tax;
• Limiting personal exemptions and deductions for high-income taxpayers; and
• Expanding the Earned Income Tax Credit.

In 1997, President Clinton agreed to cut the capital gains tax by cutting tax rates, permitting capital losses to offset other income, and for practical purposes eliminating capital gains on personal residences.

Bout #3, Round#1 – The 2001 Bush tax cuts included the following major components:

• A new 10% bracket was created for low-income taxpayers;
• The 15% bracket’s lower threshold was indexed to the new 10% bracket;
• The 28% bracket was cut to 25%;
• The 31% bracket was cut to 28%;
• The 36% bracket was cut to 33%;
• The 39.6% bracket was cut to 35%;
• The child tax credit was doubled to $1,000;
• The standard deduction was increased;
• The capital gains tax was lower for certain types of investments for taxpayers in the 15% bracket; and
• Various tax benefitted retirement plans were liberalized.

Bout #3, Round#2 – The 2003 Bush tax cuts included the following major components:

• The top capital gains tax rate was cut from 20% to 15% for all taxpayers; and
• The dividends tax rate was cut from 35% to 15%.

Bout #4 – The Obama tax cuts and tax increases included the following major components:

• The Bush tax cuts were made permanent except the tax rate on individuals making $400,000 or more and couples making $450,000 or more were increased to 39.6%, and certain deductions and exemptions were curtailed for individuals making $250,000 and couples making $300,000; and
• The capital gains tax rate and the dividends tax rate were increased to 20% for taxpayers subject to the 39.6% tax rate; and
• The maximum tax rate for estates subject to the estate tax was increased to 40%.

Other than these bouts between the tax cutters and tax raisers, significant numbers of both the tax cutters and the tax raisers joined forces in 1986 to reform the income tax by dramatically cutting personal income tax rates in which 14 tax rates were consolidated into three rates, 33%, 28%, and 15%. The 1986 reform resulted from a grand bargain in which the tax cutters got low tax rates that were paid for by getting rid of a bunch of costly tax preferences that had long been targeted for elimination by the tax raisers.

THE NATIONAL DEBT

Any time government’s expenditures exceed its revenues, it must borrow to make up the difference. The national debt, as of any moment, is the accumulation of all of government’s unpaid borrowings. Each time the government borrows, the Treasury Department issues treasury securities, commonly known as bonds or notes, to evidence the debt.

Treasury securities are guaranteed by the full faith and credit of the United States government and are considered by international debt markets, based on the relative wealth of the American economy and America’s political stability, to be the safest debt securities in the world. Treasury securities carry maturities from 30 days to 30 years. Except on very rare occasions when market factors cause short-term interest rates to exceed long-term interest rates, securities with longer maturities bear higher interest rates than those with shorter maturities. There is no danger that treasury securities will ever default because the Treasury Department can always issue new securities and use the proceeds to pay off the maturing securities—a process commonly known as rolling over the debt.

In terms of risk, there is a significant difference between owning a 30-year security as compared with a 30-day security. Although there is no difference in credit quality, 30-year bonds bear a much greater risk of inflation than 30-day bonds. Any number of surprises can strike over a long period, any of which could ignite inflation and devalue a long-term bond. Given inflation risk, investors usually demand a higher interest rate on long-term bonds, known in the trade as a “risk premium.” As uncertainty and lack of confidence in America’s financial stability grow, so too does the risk premium.

For the last several years, treasury securities have carried historically low-interest rates for a number of complex reasons, not the least of which is the strength of the American economy relative to all other major economies, low inflation, sluggish global economic growth, and plenty of available capital. As long as these conditions prevail, interest rates on treasury securities will continue to be low, but, at some point, one or more of these conditions will not prevail, and higher interest rates will return.

Each time treasury securities are issued, the Treasury Department (as the manager of the national debt) has to decide whether to issue short-term or long-term securities. Like a homeowner who takes out a short-term mortgage with a low-interest rate to save money in a gamble that interest rates will remain low, the Treasury Department gambles if it finances too much of the national debt with short term bonds, and, later, interest rates rise. Gambling is as dangerous for the government as it is for individuals.

Every week or so, the Treasury Department sells (in an auction-like process) newly issued securities in public markets, and uses the proceeds to either (a) redeem maturing securities as a means of rolling over existing debt, or (b) finance the ongoing cost of government to the extent that there are insufficient tax revenues for the current period. As of mid-2016, interest rates on treasury securities were at historically low levels. Among other things, the Great Recession has reinforced (at least for a while) the belief held by international credit markets that in times of worldwide economic strife, America’s debt remains (despite America’s current problems) the safest haven in an uncertain world.

America, however, must live with the reality that in today’s dangerous world, any number of unforeseen events could detonate a financial crisis at any time, which in turn could cause interest rates to explode and the cost of financing the national debt to soar. With each new securities sale, the market renders a fresh verdict regarding any perceived risk arising from investing in treasury securities. Any loss of confidence in America’s economy and political stability, any fear of increased inflation, and/or the appearance of a better investment alternative would likely cause interest rates on treasury securities to increase, with the size of the increase dependent on investors’ perception of the gravity of the problem.

American taxpayers have a huge stake in maintaining the confidence of bond investors. A one percentage point increase in interest rates on Treasury bonds would increase the annual cost of carry on the national debt by about $200 billion costing Americans on average about $625 annually.

Public Debt and Government Debt

By the end of 2015, the total accumulated national debt had ballooned to over $19 trillion, amounting to over 100% of current GDP which is hardly a confidence builder for bond investors. Table VIII-2 breaks down the national debt into government debt and private debt. Barring corrective action, both the total national debt and that portion held by the public will continue to grow as a percentage of GDP.

Table VIII-2 National Debt 1981-2015
End of Fiscal Year	Gross National Debt ($Millions)	Debt Held by Government ($Millions)	Debt Held by Public ($Millions)	Gross National Debt (% GDP)	Debt Held by Government (%GDP)	Debt Held by Public (%GDP)
1981	994,828	205,418	789,410	31.7	6.5	25.2
1982	1,137,315	212,740	924,575	34.3	6.4	27.9
1983	1,371,660	234,392	1,137,268	38.7	6.6	32.1
1984	1,564,586	257,611	1,306,975	39.6	6.5	33.1
1985	1,817,423	310,163	1,507,260	42.6	7.3	35.3
1986	2,120,501	379,878	1,740,623	46.7	8.4	38.4
1987	2,345,956	456,203	1,889,753	49.1	9.5	39.5
1988	2,601,104	549,487	2,051,616	50.5	10.7	39.8
1989	2,867,800	677,084	2,190,716	51.5	12.2	39.3
1990	3,206,290	794,733	2,411,558	54.2	13.4	40.8
1991	3,598,178	909,179	2,688,999	58.9	14.9	44.0
1992	4,001,787	1,002,050	2,999,737	62.2	15.6	46.6
1993	4,351,044	1,102,647	3,248,396	64.0	16.2	47.8
1994	4,643,307	1,210,242	3,433,065	64.5	16.8	47.7
1995	4,920,586	1,316,208	3,604,378	64.9	17.4	47.5
1996	5,181,465	1,447,392	3,734,073	64.9	18.1	46.8
1997	5,369,206	1,596,862	3,772,344	63.3	18.8	44.5
1998	5,478,189	1,757,090	3,721,099	61.2	19.6	41.6
1999	5,605,523	1,973,160	3,632,363	58.9	20.7	38.2
2000	5,628,700	2,218,896	3,409,804	55.5	21.9	33.6
2001	5,769,881	2,450,266	3,319,615	54.6	23.2	31.4
2002	6,198,401	2,657,974	3,540,427	57.0	24.4	32.5
2003	6,760,014	2,846,570	3,913,443	59.7	25.1	34.5
2004	7,354,657	3,059,113	4,295,544	60.8	25.3	35.5
2005	7,905,300	3,313,088	4,592,212	61.3	25.7	35.6
2006	8,451,350	3,622,378	4,828,972	61.8	26.5	35.3
2007	8,950,744	3,915,615	5,035,129	62.5	27.3	35.2
2008	9,986,082	4,183,032	5,803,050	67.7	28.4	39.3
2009	11,875,851	4,331,144	7,544,707	82.4	30.0	52.3
2010	13,528,807	4,509,926	9,018,882	91.4	30.5	60.9
2011	14,764,222	4,636,035	10,128,187	96.0	30.1	65.9
2012	16,050,921	4,769,790	11,281,131	100.1	29.8	70.4
2013	16,719,434	4,736,721	11,982,713	101.3	28.7	72.6
2014	17,794,483	5,014,584	12,779,899	103.6	29.2	74.4
2015	18,120,106	5,003,414	13,116,692	101.8	28.1	73.7
Source: Data extracted from OMB 2017, Historical Tables, Table 7.1 FEDERAL NATIONAL DEBT AT END OF YEAR, 1940-2021.

In 2015, the portion of national debt sold to the public amounted to 73.7% of GDP and the portion of national debt held by the government amounted to 28.1% of GDP. Debt sold to the public together with current tax revenues finances almost all government programs except for government transfer programs, the most significant of which include Social Security and Medicare, and a number of transportation and other miscellaneous programs.

Transfer and transportation programs are financed by dedicated taxes such as the payroll tax for Social Security and Medicare, and the gasoline tax for transportation. Dedicated taxes build up balances pending their use to pay for these programs, and these balances are held in government trust funds. In 1983, the government reorganized Social Security as recommended by the Greenspan Commission, an independent commission appointed by Congress and President Reagan in 1981, by increasing the payroll tax to a level above what was needed to pay current Social Security obligations, and provided that the surplus revenues be deposited into a trust fund for future beneficiaries. The purpose of the reorganization was to pre-fund a healthy chunk of Social Security payments in advance of the onslaught of the retiring baby boomers. Actuarially, without a payroll tax increase and accompanying surplus revenue built up in the trust fund, there would not be enough payroll taxes to pay beneficiaries full Social Security benefits beginning sometime in the second decade of the 21^st century.

Transfer programs are called transfer programs because they use tax revenues to pay the beneficiaries of the programs—a transfer from taxpayers to program beneficiaries on terms as set from time to time by the politicians. Generally, transfer payments, such as Social Security, neither enrich nor impoverish the overall economy, neither improve nor impair the creditworthiness of American debt, and neither make government bigger nor smaller. Instead, transfer payments simply change the mix of consumption and investment depending on the comparative predilections of the taxpayers (who would have spent the money one way) and the Social Security beneficiaries and those of other similar programs (who may have spent it a different way). Transfer programs have the same economic effect as with parents who leave their money to one child instead of another. The same amount of money will circulate, but it will circulate differently depending on the spending and investment preferences of the child who gets the money instead of the one who did not.

Under law, the balances held in government trust funds must be invested in treasury securities. The overwhelming majority of government debt is held in trust funds dedicated to Social Security and Medicare. Unlike government debt, private debt is held by private investors, both foreign and domestic, who buy treasury securities in the open market. Interest rates on all government bonds are set by an international market that attracts the wealthiest and most knowledgeable private and governmental investors from all over the world. These investors are all both highly sophisticated and mercenary. The moment investors lose confidence in America’s credit, interest rates will skyrocket, and/or investors will find alternative investments.

The National Debt and GDP

One of the key measures by which creditors evaluate the ability of a borrower to repay its outstanding debt is a “debt to income ratio,” aka DIR. For example, if a debtor has outstanding loans of $7,500 and an annual income of $50,000, his DIR is 15%, and if his income doubles, his DIR falls to 7.5%. The lower a debtor’s DIR, the easier it is to repay the debt. Credit analysts who monitor loans for lenders study debtor behavior and make underwriting judgments as to how high a DIR can grow without creating unacceptable credit risk.

Credit analysts who monitor America’s financial stability use a ratio similar to the DIR to evaluate its ability to repay the national debt. Instead of a DIR, most economists use a “public debt to GDP ratio” in which public debt serves as a proxy for outstanding debt and GDP serves as a proxy for America’s income. Most economists do not take government debt into account because they regard it as debt that America owes itself, not debt owed to third parties as is public debt. For accounting purposes, treasury securities held in government trust funds are treated as an asset, and the obligation to repay those same securities is treated as a liability. Since the assets offset the liabilities dollar for dollar, they cancel each other out and, therefore, are not treated as debt on the same basis as public debt. For purposes of measuring America’s debt-paying ability, total personal income (which accounts for about 87% of GDP) is the most significant component of GDP because total personal income is what is there to be taxed.

As Table VIII-2 shows, public debt as a percentage of GDP (and its major component, total personal income) has more than doubled during the last decade. Given this rapid increase, the strain on taxpayers’ ability to pay down the public debt has intensified to a level not seen for over a half-century.

As Model VIII-1 shows, even though the public debt increases in absolute terms, the public debt to GDP ratio will fall as long as the public debt growth rate is less than the GDP growth rate.

Model VIII-1 Decline in Public Debt to GDP Ratio Based on an Assumed Annual GDP Growth Rate of 3.5% and Annual Increase of Public Debt at 2.5%
End of Year	GDP	Public Debt	Public Debt to GDP Ratio
1	$16,000,000,000,000	$16,000,000,000,000	100%
10	$21,806,357,652,114	$19,981,807,519,163	92%

Even though the public debt grew almost $4 trillion over 10 years, the public debt to GDP ratio fell because the public debt grew at a slower rate than GDP. Model VIII-1 teaches that for the growth rate of the public debt to be kept in check, two factors are essential:

• GDP must grow, and the faster the better.
• The growth rate in the annual shortfall of current tax revenues to current government spending must be less than the GDP growth rate, and the lower the better.

The National Debt and Intergenerational Debt Transfer

If in any year the politicians fail to tax an amount sufficient to prevent the national debt from growing as fast as GDP, then an amount equal to the shortfall in tax revenues will be pocketed by the current generation of taxpayers to spend as they wish. This tax shortfall, however, amounts to a gift doled out by the politicians to the current generation of taxpayers at the expense of future generations of taxpayers.

A national debt growing faster than GDP means more spending money for current taxpayers and less for future taxpayers. Future taxpayers are the donors of the tax break gift to current taxpayers.

In the tax game, those taxpayers whose taxpaying lives are spent mostly during years in which the politicians dole out tax break gifts are winners, and those taxpayers whose taxpaying lives are spent mostly during years in which the politicians pay for the tax break gifts are losers. For taxpayers, then, timing is everything when it comes to paying more or less than your fair share in taxes. Justifying a tax policy that shifts the obligation to pay for current government from the current generation to future generations of taxpayers (who must pay not only their own cost of government but that of prior generations) will tax the imagination of the most brilliant economists and public policy experts.

The National Debt and National Emergencies

Except in the case of a national emergency, there is no excuse for shifting debt from one generation of taxpayers to another. In a world of economic instability, climate change, pandemics, cyberwars, and international political turmoil, one or more national emergencies looms over America at all times and may erupt without warning. Examples of a national emergency that could demand a dramatic increase in the national debt include the following:

• Deep Economic Distress.
• Natural Catastrophe.
• War.

None of these events can be anticipated and none can be discounted, but if any of these events occur and threaten the national well-being, then the government must act, and acting will cost money. When Pearl Harbor was attacked in 1941, the national debt was 50.4% of GDP, and over the next 5 years during World War II, it more than doubled to 121.7% of GDP. President Roosevelt’s response to Pearl Harbor was to mobilize the nation for war, not to call up America’s creditors and ask for an extension on its line of credit.

When confronted by a national emergency, the government should not have to beg its creditors for permission to spend whatever it takes to save the country. If the West Coast suffered an earthquake that destroyed all major West Coast cities, it is unthinkable that America should not do what it takes to cope with such a disaster regardless of the cost. As a matter of national security, America needs a financial reserve to enable it to cope with the unforeseen.

THE LIMITS TO BORROWING

The Great Recession has ushered in a new era in which America’s access to unconditional borrowing has been put in jeopardy. The American economy depends on the government having ready access to international debt markets to refinance the national debt and pay for ongoing revenue shortfalls. To maintain access to debt markets, America must do what it takes to put (and keep) its financial house in order. Putting America’s financial house in order sounds good, but for over two generations the politicians have defined “financial order” to suit their political purposes, namely getting reelected by keeping their constituencies satisfied with low taxes unrelated to government spending. The conclusions reached by the Simpson-Bowles Commission have finally given a bipartisan objective definition to what financial order means, at least as it relates to the national debt.

The Simpson-Bowles Commission

More than a decade ago, Simpson-Bowles warned (after months of study and taking testimony from experts of all leading ideologies) that America cannot be great if it goes broke. America’s businesses would not be able to grow and create jobs, and its workers would not be able to compete successfully for the jobs of the future without a plan to get control of the national debt.

As a bipartisan commission, Simpson-Bowles was the closest thing to a credible arbiter of what is necessary to get the national debt under control. In diagnosing the economic problems stemming from the national debt, Simpson-Bowles concluded the following:

• Our nation is on an unsustainable fiscal path. Spending is rising, and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference. We face staggering deficits.
• Economic recovery will improve the deficit situation in the short run because revenues will rise as people go back to work, and money spent on the social safety net will decline as fewer people are forced to rely on it. But even after the economy recovers, federal spending is projected to increase faster than revenues, so the government will have to continue borrowing money to spend.
• By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity (from national defense and homeland security to transportation and energy) will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035. Interest on the debt could rise to nearly $1 trillion by 2020.
• Federal debt this high is unsustainable. Eventually, the national debt will drive up interest rates for all borrowers (businesses and individuals) and curtail economic growth by crowding out private investment. By making it more expensive for entrepreneurs and businesses to raise capital, innovate, and create jobs, rising debt could reduce per-capita GDP, each American’s share of the nation’s economy, by as much as 15 percent by 2035.
• Rising debt will also hamstring the government, depriving it of the resources needed to respond to future crises and invest in other priorities. Deficit spending is often used to respond to short-term financial “emergency” needs such as wars or recessions. If the national debt continues to grow faster than the GDP, interest rates will eventually rise, which will make it many times more difficult for the government to cope with a financial emergency.
  

A burgeoning national debt puts America at risk in dealing with its foreign creditors. Currently, these creditors own more than half of America’s public debt. If these investors ever lose confidence in America’s financial stability, they could (and probably would) trigger a debt crisis, which would force the government to implement severe austerity measures. Such a debt crisis would most likely result in a sharp increase in interest rates. Even though creditors know that America will never default on its debt because of its ability to issue rollover debt, its creditors fear that America could issue too much debt and ignite inflation.

Being both sophisticated and mercenary, America’s creditors will demand higher interest rates at the first sign that it is issuing too much debt. Higher interest rates are the means by which creditors hedge against inflation risk. Exploding interest rates at a moment when America’s economy is in the midst of an economic crisis would inflict intense pain on millions of Americans, particularly its middle class.

Predicting the precise level of public debt that would trigger such a crisis is difficult, but a key factor may be whether the debt has been stabilized as a share of the economy or if it continues to rise. Investors, reluctant to risk throwing good money after bad, are sure to be far more concerned about rising debt than stable debt.

Simpson-Bowles pinpointed the national debt as the primary financial threat to America’s economic prosperity.

The 40% Rule

To avoid catastrophe, Simpson-Bowles urged that immediate actions be taken to “[s]tabilize debt by 2014 and reduce [public] debt to 60% of GDP by 2023 and 40% by 2035.”

Hence, the 40% rule, which means that (except in times of national emergency) that part of the national debt held by the public should not exceed 40% of GDP and that, if it does exceed it because of an emergency, the public debt to GDP ratio should be brought back down to 40% as quickly as prudence permits. The 40% Rule is a refined version of the public debt to GDP ratio that sets a definite numerical national debt ceiling as what financial experts believe is necessary to put America’s financial house in order.

The premise of the 40% Rule is the same as the type of credit rule that says that a homeowner cannot afford a house payment greater than 30% of his take-home pay. A homeowner’s pay has to cover not just housing costs but other living expenses, such as food, clothing, transportation, health care, utilities, and other miscellaneous expenses. Spending too much on a house can lead a homeowner into bankruptcy when his paycheck will not stretch to cover necessities and emergencies.

Just as there is a limit to how much a homeowner can spend on a house, there is a limit to how much debt the American economy can safely carry. The Simpson-Bowles Commission concluded that carrying public debt greater than 40% of GDP endangers the American economy in that, after paying debt service, there may not be enough national income left to support optimal private consumption and investment and pay the current cost of government, much less being able to cope with a national emergency.

The 40% Rule provides a simple and objective arithmetic test to determine whether America is over-taxed or under-taxed. Any time the public debt exceeds 40% of GDP, Americans are under-taxed, and, conversely, anytime the public debt falls below 40% of GDP, Americans are over-taxed. The over-under tax test has nothing to do with government spending which can be high or low depending on the temper of the time. No matter what, however, the 40% Rule demands that enough taxes be collected to keep the public debt no greater than 40% of GDP except in times of national emergency.

In the decade since the Simpson-Bowles Commission issued its report, the national debt has grown at an accelerating rate, the politicians have done nothing to get control over it, and the risk that America will be confronted by a debt crisis continues to grow.

An Emergency Reserve

Not only are death and taxes certain but so are national emergencies. One thing that all national emergencies have in common is that they cost a lot of money. Most families in today’s America rely upon the unused credit portion of their credit cards to get them through a family emergency, like loss of a job or serious illness. The days when families had savings accounts that they could turn to for help in the case of emergencies have long since passed.

America is just like today’s families in that its emergency reserve is the unused portion of its borrowing capacity. The lower the public debt to GDP ratio, the easier it is for America to borrow, and the less stress the added borrowing puts on the economy. Complying with the 40% Rule provides America with a margin of safety for any national emergency, and the extent to which America ignores the 40% Rule, the more difficult it will be to borrow at cheap interest rates to deal with the next national emergency. So, the 40% Rule protects America’s current financial stability, but even more importantly, it protects long-term national security.

Ony the strength of America’s economy, relative to the rest of the world, has saved it from a debt crisis prompted by the pandemic. The fact that America has not been able to incur massive amounts of debt to mitigate the effects of the pandemic does not mean that there is no limit to its ability to incur more debt. Even if America survives the pandemic without a debt crisis, there is no assurance that it will be able to do so again when the next emergency strikes.

America continues to ignores the 40% Rule at its peril.

Under-Taxation and the Dole

Under-taxation (the failure to tax enough in any year to comply with the 40% Rule) puts the current year’s crop of taxpayers on the dole; their artificially low taxes are no more than handouts. While it is the politicians who deliver the handout, it is a future generation of taxpayers who will pay for it. Handouts are generally given to those in need of charity, but most taxpayers are not charity cases. These tax handouts can be used by the recipients for one or more of the following two purposes:

• Personal Consumption
• Personal Investment (which includes personal debt reduction)

No matter the purpose to which the handout is applied, what is being spent is unearned money. Tax handouts are not earned because of either personal effort or any type of economic transaction. Rather, tax handouts are no more than fabricated money doled out by politicians catering to their special interest supporters. From the standpoint of the recipient, tax handouts are a gift, and most recipients abide by the time-honored admonition not to look a gift horse in the mouth.

Breaching the 40% Rule with Tax Handouts

From 1946 until 1981, the politicians, for the most part, successfully resisted the temptation to dole out tax handouts, but the politicians after 1981 repeatedly succumbed to the temptation except for a few years after 1993.

The 1981 Reagan tax cuts increased the public debt to GDP ratio from 26% in 1981 to 49% in 1993; the 1993 Clinton tax increases reduced the public debt to GDP ratio from 49% in 1993 to 32.5% by 2001; the 2001 and 2003 Bush tax cuts that increased the public debt to GDP ratio from 32.5% in 2001 to 54.1% by 2009; and the 2017 Trump tax cut has the public debt to GDP ratio headed for the heavens. The Reagan, Bush, and Trump tax cuts have emasculated the 40% Rule.

UNDER-TAXATION AND ITS CONSEQUENCES

Since 1981, America has been under-taxed most of the time, leaving it financially unprepared for the next national emergency. When the next emergency strikes, America will need the full array of financial tools to contend with the ensuing crisis. These tools, among others, include massive tax cuts, huge increases in spending on social insurance, increased infrastructure spending, and/or enormous aid to state and local governments. These actions will force the government to incur debt at an unprecedented level.

Eventually, America’s creditors will force it to put its financial house in order by getting control of its national debt. Given the cost of paying for two generations of under-taxing and the growing cost of social insurance due to the aging of America, taxes will have to be raised to a level never before seen. Going forward, paying historically high taxes to redress past misdeeds will make it many times more difficult to further increase taxes to pay for the expanded social insurance necessary to meet the educational, retirement, and healthcare needs of the middle class.

America, Land of Low Taxes

For most of the last two generations, Americans have not been paid for the government spending they wanted, and they cannot excuse it by claiming that they could not afford it. Comparing the taxes Americans pay against the taxes others in the world’s most modern economies pay belies the belief that Americans cannot afford to pay more taxes. Table VIII-3 shows the per capita GDP and all taxes as a percentage of GDP for the world’s leading economies.

Table VIII-3 Per Capita GDP and Taxes as a Percentage of GDP by Country – 2013
Country	Per Capita GDP – 2013(1)	Taxes as a Percentage of GDP – 2013(2)
Australia	$67,653	27.50%
Austria	$50,558	42.50%
Belgium	$46,625	44.70%
Canada	$52,309	30.50%
Czech Republic	$19,814	34.30%
Denmark	$59,819	47.60%
Finland	$49,493	43.70%
France	$42,628	45.00%
Germany	$45,601	36.50%
Greece	$21,843	34.40%
Hungary	$13,585	38.40%
Iceland	$47,493	35.90%
Ireland	$51,815	29.00%
Israel	$36,281	30.60%
Italy	$35,421	43.90%
Japan	$38,634	30.30%
Korea, Rep.	$25,998	24.30%
Luxembourg	$113,727	38.40%
Mexico	$10,173	19.70%
Netherlands	$51,425	36.70%
New Zealand	$42,308	31.40%
Norway	$102,832	40.50%
Poland	$13,776	31.90%
Portugal	$21,619	34.50%
Slovak Republic	$18,110	30.40%
Slovenia	$23,144	36.80%
Spain	$29,371	32.70%
Sweden	$60,283	42.80%
Switzerland	$84,669	26.90%
Turkey	$10,975	29.30%
United Kingdom	$42,295	32.90%
United States	$52,980	25.40%
Sources:
(1) Data extracted from download from World Bank.
(2) Data extracted from download from OECD. Stat.

In 2013, America’s GDP was $16.7 trillion, far and away the largest in the world, and it taxed—federal, state, and local—only 25.40% of its GDP, as compared with 35.50% for Germany, 32.90% for the UK, and 45.00% for France. Except for the Scandinavian countries and Australia, all with relatively small and homogenous populations, America’s wealth (as measured by per capita GDP) exceeds all other countries. And except for Japan (a country not responsible for burdensome military expenditures), America has the lowest tax burden (as measured by taxes as a percentage of GDP) of all countries. No other major country with a modern economy has America’s taxing potential to meet its public needs, maintain its financial security, and still provide its people with the most after-tax income available for personal consumption. So, America can pay its full tab for the cost of government and still have more after-tax income to consume frills and baubles than any other country of consequence.

COMMON GRIPES

A tax ought to be evaluated in terms of (1) if it is necessary to establish and maintain the financial soundness of America’s credit, (2) how it affects each taxpayer’s (a) incentive to earn the next dollar, (b) ability to invest in the economy, and (c) after-tax standard of living relative to all other taxpayers, and (3) whether it would lead to an imbalance between investment and consumption. Paraphrasing David Hume, a contemporary of Adam Smith, “ought” is one thing and “is” is quite another.

When it comes to paying taxes, neither a moral “ought” nor any economic justification will stop gripes like, “I don’t care about any of this, I’m paying too much in taxes, case closed,” a rant not a reasoned argument. Or, for a few taxpayers who are willing to discuss the merits of taxes, they often resort to “fairness” arguments like, “I’m paying too much because others are paying too little.” Just as “beauty” exists only in the eye of the beholder, “fairness” in taxation exists only in the mind of interested taxpayers. In evaluating the need for and the proper structure of a tax, fairness arguments do not shed much light except for one narrow exception. While mediating what is fair between how much in taxes a high-income taxpayer should pay relative to a low-income taxpayer is not likely to lead to much, a good case can be made that it is not fair for one taxpayer to pay significantly more in taxes than another taxpayer who has the same income.

Like it or not, America’s well-being—economically, politically, and socially—depends on having an efficient system of taxation that is supported by most taxpayers. To get such a system requires an understanding of facts and not mere acceptance of a litany of gripes.

High-Income Taxpayer Gripe: I Pay Too Much in Taxes

It is true that over the last 30 years the share of taxes paid by high-income taxpayers has grown leaving many arguing for a break. If that was all there was to it then they might have a point, but as with as with mirages, what is seemingly apparent is not necessarily real.

Table VIII-4 shows that over a 30-year period from 1986 through 2007 (the last full year before the Great Recession), the share of personal income taxes paid by taxpayers in the top 1% and taxpayers in the next 4% (in terms of adjusted gross income) increased by about 10 percentage points and 6 percentage points, respectively, while the share of personal income taxes paid by all other taxpayers fell.

Table VIII-4 Personal Income Tax Share by Descending Income Categories (the top 1%, the next 4%, the next 5%, the next 15%, the next 25%, and the bottom 50% in terms of Adjusted Gross Income) for the Period 1986-2009
	100%>99%	99%>95%	95%>90%	90%>75%	75%>50%	50%>0%
1986	25.75%	16.82%	12.12%	21.33%	17.52%	6.46%
1987	24.81%	18.45%	12.35%	21.31%	17.01%	6.07%
1988	27.58%	18.04%	11.66%	20.56%	16.44%	5.72%
1989	25.24%	18.70%	11.84%	21.44%	16.95%	5.83%
1990	25.13%	18.51%	11.72%	21.66%	17.17%	5.81%
1991	24.82%	18.56%	12.44%	21.47%	17.23%	5.48%
1992	27.54%	18.34%	12.13%	20.47%	16.46%	5.06%
1993	29.01%	18.35%	11.88%	20.03%	15.92%	4.81%
1994	28.86%	18.66%	11.93%	20.10%	15.68%	4.77%
1995	30.26%	18.65%	11.84%	19.61%	15.03%	4.61%
1996	32.31%	18.66%	11.54%	18.81%	14.36%	4.32%
1997	33.17%	18.70%	11.33%	18.47%	14.05%	4.28%
1998	34.75%	19.09%	11.20%	17.65%	13.10%	4.21%
1999	36.18%	19.27%	11.00%	17.09%	12.46%	4.00%
2000	37.42%	19.05%	10.86%	16.68%	12.08%	3.91%
2001	33.89%	19.36%	11.64%	18.01%	13.13%	3.97%
2002	33.71%	20.09%	11.94%	18.16%	12.60%	3.50%
2003	34.27%	20.09%	11.48%	18.04%	12.65%	3.46%
2004	36.89%	20.23%	11.07%	16.67%	11.85%	3.30%
2005	39.38%	20.29%	10.63%	15.69%	10.94%	3.07%
2006	39.89%	20.25%	10.65%	15.47%	10.75%	2.99%
2007	40.42%	20.20%	10.59%	15.37%	10.52%	2.89%
2008	38.02%	20.70%	11.22%	16.40%	10.96%	2.70%
2009	36.73%	21.93%	11.81%	16.83%	10.45%	2.25%
Source: Data extracted from IRS Table 5.–Returns with Positive Adjusted Gross Income (AGI): Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates, by Selected Descending Cumulative Percentiles of Returns Based on Income Size Using the Definition of AGI for Each Year, Tax Years 1986-2009.

High-income taxpayers then have a valid point that their total share of taxes has increased substantially over the last 30 years in that the tax burden of the top 5% grew substantially from 42% in 1986 to 58% in 2009. So, high-income taxpayers can justly ask, “Where does it end, and just how much of the tax burden must we bear?” The short answer is that they can pay higher taxes now and still be much better off in terms of after-tax income than they were 30 years ago.

Table VIII-5 shows that over the same 30-year period that the pre-tax income (as measured by adjusted gross income) of taxpayers in the top 1% and next 4% grew much more than that of other taxpayers, particularly those in the bottom 50%.

Table VIII-5 Percentage Increase in Adjusted Gross Income by Descending Income Categories (the top 1%, the next 4%, the next 5%, the next 15%, the next 25%, and the bottom 50%) from 1986 to 2007
Percentage Increase	100%>99%	99%>95%	95%>90%	90%>75%	75%>50%	50%>0%
Current Dollars	704.17%	397.90%	335.67%	301.08%	273.05%	256.40%
2009 Constant Dollars	372.29%	210.37%	177.47%	159.18%	144.36%	135.56%
Source: Data extracted from IRS Table 5.–Returns with Positive Adjusted Gross Income (AGI): Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates, by Selected Descending Cumulative Percentiles of Returns Based on Income Size Using the Definition of AGI for Each Year, Tax Years 1986-2009.

The top 1% enjoyed a healthy 372.29% increase in its pre-tax income while the bottom 50% suffered through an anemic 135.56% increase. In terms of a taxpayer’s ability to pay more in taxes without reducing their standard of living, no taxpayer group fared nearly as well as those at the top.

Table VIII-6 shows that over the same 30-year period the after-tax income of all taxpayer groups grew, but none more than for those at the top.

Table VIII-6 Percentage Increase in After-Tax Income by Descending Income Categories (the top 1%, the next 4%, the next 5%, the next 15%, the next 25%, and the bottom 50%) from 1986 to 2007
Percentage Increase	100%>99%	99%>95%	95%>90%	90%>75%	75%>50%	50%>0%
Current Dollars	816.61%	405.67%	348.98%	313.30%	283.65%	263.57%
2009 Constant Dollars	431.74%	214.48%	184.51%	165.64%	149.97%	139.35%
Source: Data extracted from IRS Table 5.–Returns with Positive Adjusted Gross Income (AGI): Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates, by Selected Descending Cumulative Percentiles of Returns Based on Income Size Using the Definition of AGI for Each Year, Tax Years 1986-2009.

For the top 1%, its after-tax income grew by 432% while its pre-tax income grew by 372%. For the bottom 50%, its after-tax income grew by 139% while its pre-tax income grew by 136%. After-tax income for a high-income group growing more than its pre-tax income means that taxes have become less progressive. Less progressive taxes results in those whose ability to pay is growing paying relatively less in taxes and those whose ability to pay is static paying relatively more in taxes—a potentially toxic political brew. Unless progressivity in taxes keeps pace with income concentration, both income and wealth disparities can grow to unhealthy levels.

With the recovery of the Great Recession well underway, and despite the restoration of the 39.6% highest marginal rate adopted in 2012 as a part of Obama’s tax increase, the 30-year trend of after-tax income concentrating in the top 1% continues unabated. Nothing has happened since 2012 to change this trend.

Wealthy Taxpayer Gripe: The Wealthy are Wealthy Because of Their Superior Efforts

The wealthy might argue that it is unfair to condemn wealth concentration because it resulted from their superior effort, and in many instances it is true. Others can also argue that over the last generation the government has promoted policies that accelerated wealth concentration that had nothing to do with superior efforts of the wealthy. Trade agreements that enabled cheap foreign labor to replace more expensive American workers, tax cuts that favored the well-off, deregulation policies that made business more profitable at the expense of public safety and financial soundness, and tax subsidies that favored business and well-off individual taxpayers all contributed to wealth concentration and had nothing to do with superior effort. Wealth concentration, then, is by no means solely, or even in some instances primarily, due to the superior efforts of those who have it. So, is it “fair” to say that wealth accumulation is the result of superior effort?

Another High-Income Taxpayer Gripe: Everybody Should be Taxed at the Same Rate

Some high-income taxpayers might argue that having the successful pay taxes at higher rates than the less successful penalizes success. The less successful could respond that having the successful pay taxes at higher rates is not a penalty but a mathematical necessity forced by the intense concentration of income at the top. If everyone paid taxes at the same rates, then many millions of Americans would be pushed into poverty and many millions more would be pushed more deeply into poverty. Is it fair that millions of Americans be mired in poverty to keep high-income taxpayers from paying taxes at higher tax rates than the less well-off?

Hard-Working Taxpayer Gripe: I Worked Hard for my Money and Nobody Should Take It Away

The wealthy might argue that they work hard for their money, and it is unfair to tax it away. All others could respond that not only do some of the wealthy work hard, but they do too. A coal miner, a long-haul truck driver, a fireman, a soldier, and millions of others could argue that their jobs are harder and involve more personal risk than does that of a hedge fund manager, radio talk show host, or star athlete, and that the tax laws have nothing to do with how hard anyone works for their money.

Many of the wealthy worked hard for their money, but some got their money by luck, fortuity, inheritance, or winning the lottery. A CEO of a Fortune 500 Company may work 80 hours a week and have $50 million in taxable income while a ne’er-do-well wins the lottery and has $50 million in taxable income—both would pay a lot of tax. The amount of taxes a taxpayer pays depends on how much money they make, not how hard they work for it. Is it fair to tax on the basis of who works hard and who does not?

The Wasteful Spending Gripe: I Should Not Have to Pay for Wasteful Spending

The wealthy might argue that it is unfair to tax them to pay for wasteful spending. All others could respond that once a bill has been incurred whether it is by an individual or the government, then someone has to pay for it. Once a bill has to be paid, all taxpayers, including both the well-off and the not so well-off, have to pay it. All should agree that the only financially sound way to cope with wasteful spending is to nip it in the bud and not to renege on paying for it later. Is it fair that the wealthy be exempted from paying for government waste?

The Paying for Welfare Gripe: I Should Not Have to Pay for Things that Those with Low-Income Want but Cannot Afford

The wealthy might argue that it is unfair to tax them to pay for subsidies for food stamps, higher education, medical care, and so forth for the less well-off. The less well-off could argue that it is their low wages that account for their increasing need for subsidies for food, education, and health care. If their wages had kept pace with the better-off over the last generation, the need for these subsidies would not be nearly as great. The wealthy, moreover, have little to complain about because cheap labor results in higher profits for capitalists and lower costs for consumers. There is a price to be paid for low-cost babysitters, leaf blowers, construction workers, salesclerks, etcetera. Is it fair that many of the wealthy enjoy the fruits of cheap labor and do not have to pay taxes to help low-wage workers have a decent standard of living?

The Paying for Past Sins Gripe: The Wealthy Should Not be Taxed to Pay for Years of Deficits

The wealthy might argue that it is unfair to tax them now to make up for years of deficit spending. All others can argue that it was the wealthy who benefitted mostly from a generation of deficit spending because the Reagan, Bush, and Trump tax cuts were skewed in favor of the most well-off and were financed dollar for dollar by increasing the national debt. Taxing the wealthy now is no more than having them contribute to repaying a portion of the national debt that was jacked up to finance past tax cuts that disproportionately benefitted them. What goes around comes around. Is it fair that the wealthy pocket the Reagan, Bush, and Trump tax cuts without paying that part of the national debt that is attributable to them?

THE ENDLESS AND POINTLESS QUESTIONS OF FAIRNESS

Depending on whose ox is gored, questions about tax fairness can go on endlessly without making a useful point. Many taxpayers in all categories will never be persuaded by arguments—reasonable or unreasonable and fair or unfair—and in the end will resort to, “I don’t care about this, I don’t want to pay another penny in taxes.” But unless America cuts through the mindless griping and increases taxes, it will be financially insecure and will shrink instead of growing. It will be a world in which the American Dream will fade into middle-class obscurity for most ordinary Americans.