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Wednesday, November 10, 2010

Taxes

Before the federal income tax was established by the 16th Amendment to the Constitution in 1913. There were periods when income taxes were collected, 1862 to 1872 to pay for the Civil War. But otherwise the federal government received its revenue from tariffs, taxes on businesses, tax on property and property transfer (sales), sales tax, import/export tax and tax on alcoholic beverage production. But the country needed a more stable form of revenue and there was a need to redistribute the county's wealth to the common citizen to counter the overwhelming wealth that developed during the gilded age of the robber barons.

There was a need to build paved roads for the new automobile and trucks delivery goods, string power lines across the country, build water treatment plants and sewer treatment plants, build new sea ports for the new and larger steel ships being built and damns on rivers for drinking water and power generation.

The income tax was a very progressive idea highly supported by the progressives of the Republican Party at that time. Just the reverse of today's Republican Party. Why? Well as soon as the 16th Amendment was passed, the very wealthy collectively chose the minority conservative wing of their Republican Party to throw their money behind to eliminate the majority progressives in the party. They were very successful and it transitioned into the very conservative, anti-tax party we have today. Why the Republican Party? It was the party of the northern states where most industrial companies were located, whereas the south were solid Democratic as it was an agrarian economy. Today politically that has flipped completely.

After the Great Depression, FDR pushed for a more progressive tax rate to obtain badly needed revenue for the country's depression recovery and war, so it came from the very wealthy. Taxes on the very wealthy rose to as much as 70% to 90%. However, few every paid that rate, as there were hundreds of loop holes and deductions they could take to reduce their taxable income and tax rate. The tax rates rapidly dropped after the war and today the highest tax rate is a very modest 35% for incomes $300,000 and above. Most of the loop holes and deduction are now gone. If the Democrats get their tax proposal passed during the lame duck session, it would raise the tax on the income over $250,000 to 39% (same as during the Clinton area), but they would be taxed at the current lower 35% level on their income of $249,999 and below. All the lower brackets would remain the same as they are today, which are the lowest they have ever been, thanks to Obama's stimulus bill.

No one wants to see their taxes increase, but adding 700 billion dollars to our already huge debt over the next ten years, and if the Bush tax rates are made permanent, it would be nearly 3 trillion dollars the ten years after that. Our grandchildren will be paying huge taxes just to pay the interest on the debt. The interest payment alone would exceed our total annual budget we have now. That is not sustainable.

Those who are making millions and some billions (hedge fund managers) from the financial collapse should pay higher taxes to help in the recovery of the nation and reduce the debt for which they have received great benefit from. We learned that lesson before, we must understand why it is needed so greatly now. Without it we will be forced to default on the debt and send the country and world into another Super Great Depression. There is no other alternative. Even eliminating every entitlement from the budget would not save us. Even eliminating federal government in totality would not pay for the interest payment on the debt.

70% of our total annual budget is for defense, a sum that is greater than all the other countries of the world defense budgets combined. We do need a strong defense, but we must look at our deployments in Europe and other nations to see if they are truly necessary for their and our security. We must stop spending money on systems that we no longer need that are costing tens of billions of dollars.

The next largest amount goes to paying the interest on the total national debt. The only way to reduce that amount is to reduce the debt. Most of this is due to the Bush tax cuts and his huge increase in expenditures for two wars, expansion of government, and Part D prescription drug plan for Medicare.

We need to get our intelligence expenditures under control. Much like the defense industrial complex that is eating huge sums of money, the newly created Home Land Security has hired hundreds of private intelligence contractors and it is unknown what they provide in the way of security.

And yes, most other departments can have budgets reduced and still provide their needed services, but they only make up a very small portion of the total budget.

With all the talk of Social Security and Medicare, people forget that every working individual pay into these programs separate from their federal income tax deductions. Social Security is self funding and does not draw money from the general budget. The issue with it is that there are fewer workers paying in right now and the baby boomers are drawing funds at a larger rate than incoming payments limited number of workers today. Of course if we can get everyone back to work with higher wages, the amount of money coming into Social Security would easily cover its outgoing. One simple change would be to eliminate the income cap for paying into the system and maybe an income litmus test to receive money. The same for Medicare, however, that one needs further reform and modification into the only national health care program that then could be self sustaining and cover everyone.

The conservative Republicans and Blue Dog Democrats have got to understand the realities of the situation and come to grips with what is needed as a solution before it is too late.

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