Taxes

Through some of the biggest growth and success of America, the wealthiest were taxed at what would be considered Draconian amounts today. Shortly after World War 2, the government taxed the wealthy around 90% of their income. Yes, 90%. This lasted through the 1960s. In the 1970s, we lowered the tax rates to around 70% and in the 1980s, Reagan lowered them to 50% and then down to about 30%. In the 1990s, during the last economic crisis, the tax rates were raised to around 40%. Now they are back to round 35% or so.

The problem, as always, is where is the money? By that I mean, who has the money? The federal government can only get taxes from people who can pay taxes. During the 1950s and 1960s, the federal government taxed the hell out of the upper classes because they were the ones with the money. This allowed the government to afford all the for-work projects it created to get the huge influx of people injected into the workforce as the men came home from war and the women did not want to give up their own careers and go back to being exclusively homemakers.

As the workforce expanded, even more jobs were created, which allowed poorer individuals to move up, and allowed the middle class to both spring into existence and grow in size (millions of people) and wealth (percentage of wealth in their collective hands). The bulk of the wealth of America shifted from a few people having a lot of money and the majority not having it, to the majority of the wealth being spread over a lot of people, with only a few on the extreme ends. In this way, the federal government was able to ease the tax burden on everybody and lower the tax rates on the rich while easing the tax rates on the huge middle class. As the middle-classes' amount of the wealth slowly increased, the federal government steadily lowered the tax rates on the rich, as they didn't need to shoulder the bulk of the burden any more, and the much lower rates on the steadily increasing middle-class continued to cover the needs of the government.

However, the government did not change this philosophy as the wealth started to move back into the hands of a minority of people again during the 1990s. The tax rates were changed for a brief time and America was able to "right the ship" on the false belief that the economic crisis was over. However, Bush lowered the taxes again on the wealthy during the 2000s, and the money continued flowing faster toward a minority of people again. Middle-class wages were no longer keeping up with or exceeding inflation, people's dollars were not buying what they once could (like housing and cars), and the middle-class had to borrow increasing amounts of credit to do what they wanted, while the rich got wealthier and inject less of that money back into the economy as either purchases or taxes.

I guess a simple way to put it is like this:

The federal government needs $1000 to run. You have 10 people from which to gather the $1000.

• 1 person makes $1000 (top 10 %)
• 2 people make $500 each (wealthy)
• 5 people make $100 each (middle class)
• 1 person makes $50 (minimum wage)
• 1 person makes $10 or less (poor or out of work)

If you only tax the 5 middle class people any amount, including 100% of their income, you cannot reach the $1000 you need to run the government. If, however, you tax the top 30% a tax rate of 45%, you net $900 of the dollars needed ($450 from the top and $225 each from the next two). Now the 5 people making $100 only needs to make up the remaining $100, or be taxed at about 20% each ($20 each). Notice that those in the lowest brackets don't even need to pay taxes, even though they may be the people who benefit the most out of the government's use of its funds.

Now, here's the thing: the middle class is taking home $80 (or 80%) of their income, which they can use to buy a lot of goods and services, assuming that their buying power is strong. As a whole entity, the middle class has a collective buying power of $400. The next wealthiest group, even though they are being taxed more than double what the middle class makes, takes home 3.5 TIMES the middle class amount ($275/ea), so are still considered very wealthy. The top 10% take home almost 7 TIMES the middle class amount ($550), and nearly double what even the next wealthiest 20% do, so are still considered extremely wealthy and have huge buying power and ability to create jobs and more income!

This is why high tax rates on the wealthy work. You can tax them using extremely high tax rates and they still take home more money than the middle class workers do, by a large amount.

You can find many graphs online that show the money discrepancy in America. Using the same example data, above, we are taxing all but the lowest class approximately 30%, which is why we have a deficit. If you tax everyone 30%, you only take in $765 of the $1000 you need to run the government. Either you have to cut government programs to work under the new figure, or you have to raise taxes.

The other problem is that the buying line has shifted. In my first example, I'm assuming a buying power of $50. The minimum wage people are, therefore, living paycheck-to-paycheck and just scraping by, the middle class (after taxes) has room for some savings and extra purchases, and the wealthy have huge buying power. Today, however, that is not true. They buying power is at about $80. So the poor are at a huge disadvantage, with nearly no upward mobility. The minimum wage people get farther behind with few chances to move up. The middle class is slowly getting farther behind and cannot put much away for savings, with fewer chances to move up. But the wealthiest 30% are not touched at all and see nothing wrong or problematic with the system.

Here's a great video that illustrates the income discrepancy in America.

http://www.youtube.com/watch?v=QPKKQnijnsM

Notice that the respondents know and understand that the distribution of wealth should be unequal. People understand that there should be stratuses of wealth, as it gives them something to work and strive for. What people do not understand is how much wealth the top 20% (and the top 1%) actually has. Once you realize how much of the actual dollars are with the wealthy, you understand that they MUST be taxed higher because THEY HAVE THE MONEY. You cannot get blood from a stone, and the middle class simply no longer has the bulk of the money. Its buying power isn't the equivalent to the wealthiest people any more... not by a long shot.

Is that video the end-all, be-all? No, of course not. It has well-documented flaws. But it shows the vast disparity of where the wealth is actually located. When you take into account that Congress keeps pushing for yet more tax breaks for the wealthiest, even though that is where the money is located, that means the non-wealthiest have to pay more in taxes, even though they don't have the money to do so. The more they pay in taxes, the lower their buying power to purchase items that keep the economy running and the fewer dollars they can save for retirement or emergencies. So,either the wealthiest 20% (and 1% in particular) need to be taxed at much higher rates OR they need to spend the equivalent of what the 100 million or so "middle class" people would be spending on items, goods, and services to keep the economy flowing. So, either way, the wealthiest few need to inject more money into the system because they are the ones with the money.

And, frankly, as my simplistic example above showed, you can tax the wealthiest at significantly higher rates and it doesn't affect their buying power or their status. It won't affect people trying to strive to be in that stratum of the country, either. But, regardless, that money HAS TO flow into the country either via purchases (and, simply put, the wealthiest few simply cannot purchase enough "stuff" to keep the economy going-- there are only so many houses, cars, refrigerators, and toys that a million people need) OR via taxes.

Addendum

Read this post, written over two years after I made this post. Interesting that some of the rich are coming to similar conclusions.